I noted at the end of chapter 4 that even before the crisis of 2008 it was hard to see why financial deregulation was considered a success story. The savings and loan mess had provided an expensive demonstration of how deregulated bankers could run wild; there had been near-misses that foreshadowed the crisis to come; and economic growth had, if anything, been lower in the era of deregulation than it had been in the era of tight regulation. Yet there was (and still is) a strange delusion among some commentators—by and large, although not entirely, on the political right—that the era of deregulation was one of economic triumph. In the preceding chapter I observed that Eugene Fama, a celebrated finance theorist at the University of Chicago, declared that the era since financial deregulation began has been one of “extraordinary growth,” when it has in fact been nothing of the sort.

…

First, even though the United States avoided a debilitating financial crisis until 2008, the dangers of a deregulated banking system were becoming apparent much earlier for those willing to see.
In fact, deregulation created a serious disaster almost immediately. In 1982, as I’ve already mentioned, Congress passed, and Ronald Reagan signed, the Garn–St. Germain Act, which Reagan described at the signing ceremony as “the first step in our administration’s comprehensive program of financial deregulation.” Its principal purpose was to help solve the problems of the thrift (savings and loan) industry, which had gotten into trouble after inflation rose in the 1970s. Higher inflation led to higher interest rates and left thrifts—which had lent lots of money long-term at low rates—in a troubled position. A number of thrifts were at risk of failing; since their deposits were federally insured, many of their losses would ultimately fall on taxpayers.

…

(I got some of this into the original, 1999 edition of The Return of Depression Economics, where I drew parallels between the LTCM crisis and the financial crises then sweeping through Asia. In retrospect, however, I failed to see just how broad the problem was.)
But the lesson was ignored. Right up to the crisis of 2008, movers and shakers insisted, as Greenspan did in the quotation that opened this chapter, that all was well. Moreover, they routinely claimed that financial deregulation had led to greatly improved overall economic performance. To this day it’s common to hear assertions like this one from Eugene Fama, a famous and influential financial economist at the University of Chicago:
Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth.

It is along this road that the Berkeley Mafia and the real Jakarta mafia – inadvertently assisted by the Rolling Stones’ Mick Jagger – brought financial deregulation to a devastating conclusion.
The Golden Triangle part is where most of the scores of new bank headquarters were thrown up beginning in 1988. Many of the banks on this ‘Bank Alley’ have disappeared since the crisis, but the buildings remain, one after the other down the boulevard. Plus there are the uncompleted projects, like the BDNI twin towers. Further south, much of the land at the farthest reaches of Sudirman, south of the Semanggi bridge, was a squatter slum when the final push on financial deregulation began. This area became the site for a new, purpose-built financial zone known as the Sudirman Central Business District (SCBD).
The story of the SCBD began in the same month that Sumarlin opened up the banking sector, when Mick Jagger (temporarily estranged from the rest of the Rolling Stones) held a concert in the Senayan stadium on the opposite side of the road.

…

Re-enter the cavalry
When the crisis broke, and the IMF was called in, Fund experts had no good ideas about what to do because, like Dr Frankenstein, it had been they who had created this new kind of monster with their deregulation policies. Used to the spendthrift governments of Latin America, the IMF prescribed budget cuts and high interest rates, as it had in Thailand. However, the problem throughout the region was not government budgets, but a private sector speculative frenzy made possible by financial deregulation and the absence of effective development policy. IMF austerity merely throttled the real economy.
Financial deregulation had led to a boom in unhedged short-term offshore borrowing by banks and large, non-exporting firms. Such loans outstanding in Indonesia doubled in the eighteen months before the crisis and, as borrowers scrambled for dollars to repay them, they drove the rupiah exchange rate through the floor.110 An exchange rate which dropped from 2,500 to the dollar in July 1997 to a monthly low of 14,000 in July 1998 meant a collapse of import purchasing power, including for inputs needed by Indonesia’s overwhelmingly small-scale manufacturers.

…

But governments directed the hefty investments this made possible to the wrong ends – to lower-yield, large-scale agriculture, and to companies that were either not focused on manufacturing or only on manufacturing for protected domestic markets. South-east Asian states then made their developmental prospects even worse by following rich country advice to deregulate banking, to open up other financial markets, and to lift capital controls. The same advice had been proffered to Japan, Korea, Taiwan and China in the early stages of their development, but they sensibly resisted for as long as possible. Premature financial deregulation in south-east Asia led to a proliferation of family-business-controlled banks which did nothing to support exportable manufacturing and which indulged in vast amounts of illegal related-party lending. It was a story of banks being captured by narrow, private sector interests whose aims were almost completely unaligned with those of national economic development. The process was one which has also been observed in Latin America and, more recently, in Russia.

Economic historian Peter Temin argues that these neoliberal policies created a “dual economy” composed of a high-wage FTE (finance, technology and electronics) sector and a low-wage one of semi-skilled and unskilled workers that straddled a shrinking middle-income group of manufacturing and white-collar jobs.
Along the same lines, economist Stephen Rose has shown that the rising difference in income and wealth prevailed not just between the 1 percent and the 99 percent, but between the top 30 percent—including a growing upper middle class—and the bottom 70 percent. These trends, reinforced by further financial deregulation, an overvalued dollar, and regressive tax policies, would continue up through the onset of the Great Recession and fuel discontent among the middle and lower-middle classes, many of whom felt cast aside by the move toward a post-industrial economy heavily dependent on finance and financial services. (As I will recount, something very similar happened in Western Europe.)
The first visible crisis came in 1991, when the U.S. suffered from a peculiar recession that seemed to drag on for four more years in joblessness and wage stagnation.

…

In addition, many Americans were troubled by the continuing loss of manufacturing jobs to Japan and Western Europe, and the rapid rise in illegal immigration in the Southwest. Public opinion expert Daniel Yankelovich wrote, “Even though they can’t put their finger on it, [people] fear something is fundamentally wrong with the U.S. economy.”
When party leaders’ promises—that free trade deals would create far more jobs than they would threaten, that immigration measures would stop the flood of immigrants entering the country illegally, and that financial deregulation would have no ill effects—proved false, it sparked a populist challenge to the prevailing consensus. That challenge came in the 1992 and 1996 elections from Texas businessman Ross Perot, and from former Nixon and Reagan aide Pat Buchanan. Perot represented a left and center-left populism, and Buchanan a challenge from the right, but like other American populists, they didn’t fit the conventional conflict between Democrats and Republicans or between liberals and conservatives.

…

With the high-tech boom exhausted, and manufacturing still generally plagued by global overcapacity, these dollars were directly or indirectly fueling consumer debt, particularly in housing. The housing boom was sustaining demand in an economy that might have otherwise slowed. When the housing bubble burst in 2007, millions lost their homes and financial institutions were put at risk. A steep recession followed. But the crash was also precipitated by the politics of neoliberalism—by financial deregulation under Carter, Reagan, and Clinton, and lax regulation under George W. Bush; by trade and investment policies that led to unwieldy dollar surpluses in the hands of China and other Asian nations; and by tax policies and anti-union business practices that widened economic inequality and led to the need to prop up consumer demand through the accumulation of debt.
The financial crisis became widely visible in September 2008 when the New York investment bank Lehman Brothers had to close its doors.

.* Using different data sources, Lapavitsas estimates that the UK number rose from around 700 per cent in the late 1980s to over 1,200 per cent by 2009 – or 1,800 per cent, if we included assets owned abroad by UK citizens and companies.11 James Crotty, using American government data, calculated that the ratio of financial assets to GDP in the US fluctuated between 400 and 500 per cent between the 1950s and 1970s, but that it started to shoot up from the early 1980s, following financial deregulation. It broke through the 900 per cent mark by the early 2000s.12
The New Financial System and Its Consequences
The new financial system was to be more efficient and safer
All this meant that a new financial system has emerged in the last three decades. We have seen the proliferation of new and complex financial instruments through financial innovation, or financial engineering, as some people prefer to call it. This process was enormously facilitated by financial deregulation – the abolition or the dilution of existing regulations on financial activities, as I shall discuss later.
This new financial system was supposed to be more efficient and safer than the old one, which was dominated by slow-witted commercial banks dealing in a limited range of financial instruments, unable to meet increasingly diverse demands for financial risk.

…

The US government had to close down nearly one-quarter of S&Ls and inject public money equivalent to 3 per cent of GDP to clean up the mess.
The 1990s started with banking crises in Sweden, Finland and Norway, following their financial deregulations in the late 1980s. Then there was the ‘tequila’ crisis in Mexico in 1994 and 1995. This was followed by crises in the ‘miracle’ economies of Asia – Thailand, Indonesia, Malaysia and South Korea – in 1997, which had resulted from their financial opening-up and deregulation in the late 1980s and the early 1990s. On the heels of the Asian crisis came the Russian crisis of 1998. The Brazilian crisis followed in 1999 and the Argentinian one in 2002, both in large part the results of financial deregulation.
These are only the prominent ones, but the world has seen so many more financial crises since the mid-1970s. According to a widely cited study,17 virtually no country was in banking crisis between the end of the Second World War and the mid-1970s, when the financial sector was heavily regulated.

…

According to a study published in 2005, in the US, between the mid-1960s and the late 1970s, the rate of profit for financial firms was lower than that of the non-financial firms. But, following financial deregulation in the early 1980s, the profit rate of financial firms (on a rising trend, ranging between 4 per cent and 12 per cent) was significantly higher than that of non-financial firms (2–5 per cent) until the early 2000s (the data in the study ended there). In France, the profit rate of financial corporations was negative between the early 1970s and the mid-1980s (no data are available for the 1960s). With the financial deregulation of the late 1980s, it started rising and overtook that of non-financial firms in the early 1990s, when both were about 5 per cent, and rose to over 10 per cent by 2001. In contrast, the profit rate of French non-financial firms declined from the early 1990s, to reach around 3 per cent in 2001.

Thomas Philippon and Ariell Reshef have analyzed financial sector compensation and found that the “excess relative wage” in finance—the amount that cannot be explained by differences in education level and job security—grew from zero around 1980 to over 40 percentage points earlier this decade; 30–50 percent of excess wages in finance cannot be explained by differences in individual ability. They also found that deregulation was one factor behind the recent growth of compensation in finance. (Figure 4-2 shows the relationship between the unadjusted relative wage in the financial sector—the ratio between average wages in finance and average wages in the private sector as a whole—and the extent of financial deregulation, as calculated by Philippon and Reshef.)77
Figure 4-2: Relative Financial Wages and Financial Deregulation
Source: Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the U.S. Financial Industry: 1909–2006,” Figure 6.
The rewards for success grew much, much faster as traders’ potential bonuses climbed into the millions and then the tens of millions. In 2008—which was a horribly bad year for most banks—1,626 JPMorgan Chase employees received bonuses of more than $1 million; at the smaller Goldman Sachs, which had thirty thousand employees, 953 received bonuses of more than $1 million, and 212 received bonuses of more than $3 million.78 In the 1990s, Internet start-ups were seen as the quickest route to vast wealth, for the lucky few who founded companies that successfully went public.

…

Ordinarily, low equity levels (high debt levels) should increase a bank’s riskiness by increasing the likelihood that it will not be able to pay off its debts in a crisis. Yet despite the increase in leverage, tighter regulation prevented any serious banking crises. As Figure 1-1 demonstrates, the half-century following the Glass-Steagall Act saw by far the fewest bank failures in American history.103 But once financial deregulation began in the 1970s, these low equity levels became increasingly dangerous.104
Figure 1-1: Bank Suspensions and Failures Per Year, 1864—Present
* Actual values for 1930-33 are 1,352, 2,294, 1,456, and 4,004.
Source: David Moss, “An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of ‘Too Big to Fail,’” Harvard Magazine, September–October 2009. Used with the permission of Mr.

…

The eventual result was an out-of-balance financial system that still enjoyed the backing of the federal government—what president would allow the financial system to collapse on his watch?—without the regulatory oversight necessary to prevent excessive risk-taking.
Like many major trends, this one was not entirely visible to its participants at the outset. Throughout American history, regulatory change has been more about settling disputes between segments of the business community than about sweeping social transformations, and the beginnings of financial deregulation were no different.
Fixed commissions for stock trading were one of the first dominoes to fall. As David Komansky, later CEO of Merrill Lynch, recalled, “There was no discounting, no negotiating. Fixed prices meant fixed prices for the entire Street; we couldn’t give you a discount even if we wanted to. It was the greatest thing in the world.”30 Most Wall Street brokerage firms were happy to profit from this cartel.

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The Production of Money: How to Break the Power of Banks
by
Ann Pettifor

Gillian Tett, one of the few journalists bold enough to explore and challenge the world of international financiers and creditors, blames a ‘pattern of “social silence” … which ensured that the operations of complex credit were deemed too dull, irrelevant or technical to attract interest from outsiders, such as journalists and politicians.’8 Finance was indeed too dull and arcane to attract the interest of mainstream feminism and environmentalism.
As a result of this ‘social silence’ citizens were unprepared for the crisis, and they remain on the whole ignorant of the workings of the financial system and its operations.
The experience of financial deregulation has shown that capitalism insulated from popular democracy degenerates into rent-seeking, criminality and grand corruption. As Karl Polanyi predicted in his famous book The Great Transformation, societies are building resistance to the ‘self-regulating market comprising labour, land and money’ – or market fundamentalism, even when blind resistance appears irrational.9 In the US, as I write, the voters of the United States have sought protection from a demagogic president-elect who promised to defend them by erecting a wall between the United States and Mexico.

…

CHAPTER 5
Class Interests and the Moulding of
Schools of Economic Thought
Economic fundamentals are all sound; it’s a good time for tighter credit conditions … the recent sell-off in financial markets is good news … The world economy is strong enough to cope with the consequences.
The Economist, 4–10 August 2007
Editors and journalists at the Economist magazine were not the only professional economists to make entirely the wrong call in the week that inter-bank credit ‘crunched’ and the 2007–09 global financial crisis began in earnest.1 Most academic economists shared their blind spot for the likely impact of financial deregulation on the financial system, the global economy and societies around the world.
A great deal of the power exercised by financiers operating in financial markets derives from the studied indifference of orthodox academic economists to the production of money and the social construct that is the rate of interest on money. Staggering though it might seem to a non-academic audience, the overwhelming majority of mainstream economists do not understand, nor do economists study, the nature of credit and money, or indeed the wider financial and monetary system.

…

The mighty economy of the United States struggled to fully recover from the crisis, and was not immune to the rise of political populism and the threat of ‘corporate fascism’ – the merger of state and corporate power.
Yet economists (with some notable exceptions) stood aloof from these crises largely of their own making. And when they deigned to engage it was to adopt an attitude of defeatism. Often it was victims of financial deregulation – like the sub-prime borrowers of the US’s Rust Belt – that were blamed for borrowing too much and causing the crisis. According to one of the most powerful mainstream and so-called ‘Keynesian’ economists Larry Summers, societies were living through ‘The Age of Secular Stagnation’ caused by a ‘natural’ rate of interest that was too low! The public were constantly enjoined to simply accept the fate of falling incomes, cuts in public investment, financial failure, bankruptcy and unemployment, for as the economists effectively argued: ‘there is nothing to be done’.

This rationalization is all too readily accepted by the mass media, which is not surprising, given that it neatly absolves the majority of business reporters and editors who had missed the story for years until it was too late.
The facts are otherwise. It is not conspiratorial but rather accurate to suggest that blame can be assigned to those who consciously developed and implemented a policy of radical financial deregulation that led to a global recession. As President Clinton’s Treasury secretary, Rubin, the former cochair of Goldman Sachs, led the fight to free the financial markets from regulation and then went on to a $15-million-a-year job with Citigroup, the company that had most energetically lobbied for that deregulation. He should remember the line from the old cartoon strip Pogo: “We have met the enemy and he is us.”

…

Clinton’s public rationale for this watershed shift was that if regulation of Wall Street were not “modernized”—political code for weakened or eliminated—the United States would lose out to foreign competition in capital markets.
Much of the groundwork for Clinton’s break was laid by the diligent Republican Wendy Lee Gramm and her husband, Senator Phil Gramm, also a Texas Republican. The high priestess and priest of financial deregulation met at a conference in New York, where Wendy Lee, a PhD student in economics, was interviewing with Phil Gramm for a position at Texas A&M University, where he was a senior professor. Wendy Gramm would later tell interviewers that as Professor Gramm was helping her on with her coat at the interview’s conclusion, he expressed interest in dating her if she came to Texas. She later told the New York Times her reaction to him was “Oh, yuck,” but Gramm persisted, and six weeks after she arrived on campus, they wed.

…

If regulators approve the merger, Citigroup, as the company will be called, will serve about 100 million customers in 100 countries. In one stroke, [they] will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.
Nor was there much evidence of that purported indelible line between the newspaper’s editorial position and its journalistic coverage when it came to financial deregulation. A news story in the Times that same day echoed the editorial’s theme, that the merger would force a reversal of the dreaded New Deal legislation. The lead paragraph of the story, ostensibly straight news reporting, gushed over this “bold merger,” reading like a press release for Citigroup:In a single day, with a single bold merger, pending legislation in Congress to sweep away Depression-era restrictions on the financial services industry has been given a sudden, and unexpected, new chance of passage.

Making fortunes in finance requires not just confidential early information on likely developments in ‘the market’, but also intimate knowledge of government policies, preferably in advance, and a capacity to influence such policies, both their conception and their implementation. Not surprisingly, then, no other industry, except perhaps armaments, has developed anything like Wall Street’s rotating door relationship with the U.S. government. There is Robert Rubin, treasury secretary from 1995 to 1999 under Clinton, and Henry Paulsen, in the same position under Bush the Younger, from 2006 to 2009 – both former CEOs of Goldman Sachs, the one instrumental for financial deregulation, the other presiding over its results in 2008. The two are, however, only the tip of a truly titanic iceberg, as there were and are literally hundreds of former and later Goldman people occupying a wide variety of government positions.50 One may also take a figure like Lawrence (‘Larry’) Summers, Rubin’s deputy and successor at the U.S. Treasury, for decades now untiringly moving from academia to government to finance and back, and being richly rewarded for it.51 And not to be forgotten is the Attorney General of the Obama administration, Eric Holder, in office from 2008 to 2014.

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In any case, in what looks like an afterthought, Gordon supports his prediction of low or no growth by listing six non-technological factors – he calls them ‘headwinds’ – which would make for long-term stagnation ‘even if innovation were to continue … at the rate of the two decades before 2007’.30 Among these factors he includes two that I argue have for some time been intertwined with low growth: inequality and ‘the overhang of consumer and government debt’.31
What is astonishing is how close current stagnation theories come to the Marxist underconsumption theories of the 1970s and 1980s.32 Recently, none other than Lawrence ‘Larry’ Summers – friend of Wall Street, chief architect of financial deregulation under Clinton, and Obama’s first choice for president of the Federal Reserve, until he had to give way in face of congressional opposition33 – has joined the stagnation theorists. At the IMF Economic Forum on 8 November last year, Summers confessed to having given up hope that close-to-zero interest rates would produce significant economic growth in the foreseeable future, in a world he felt was suffering from an excess of capital.34 Summers’ prediction of ‘secular stagnation’ as the ‘new normal’ met with surprisingly broad approval among his fellow economists, including Paul Krugman.35 What Summers mentioned only in passing was that the conspicuous failure of even negative real interest rates to revive investment coincided with a long-term increase in inequality, in the United States and elsewhere.

…

The felicitous term, ‘privatized Keynesianism’, was coined to describe what was, in effect, the replacement of public with private debt.12 Instead of the government borrowing money to fund equal access to decent housing, or the formation of marketable work skills, it was now individual citizens who, under a debt regime of extreme generosity, were allowed, and sometimes compelled, to take out loans at their own risk with which to pay for their education or their advancement to a less destitute urban neighbourhood.
The Clinton policy of fiscal consolidation and economic revitalization through financial deregulation had many beneficiaries. The rich were spared higher taxes, while those among them wise enough to move their interests into the financial sector made huge profits on the evermore complicated ‘financial services’ which they now had an almost unlimited licence to sell. But the poor also prospered, at least some of them and for a while. Subprime mortgages became a substitute, however illusory in the end, for the social policy that was simultaneously being scrapped, as well as for the wage increases that were no longer forthcoming at the lower end of a ‘flexibilized’ labour market.

During Reagan’s first term in office, low-income families lost $23bn in revenue and Federal benefits, while high-income families gained over $35bn. This explained the massive endorsement of Reagan in the prosperous suburbs and the Sun Belt. In Britain, more subservient than ever before, individual greed was shamelessly encouraged by the lowering of income tax (helped by the North sea oil bonanza), along with the sale of council houses and other state assets. Financial deregulation stimulated the formation of a class of nouveau entrepreneurs, who thought little of safety regulations or trade-union rights for their employees.
A hallucinatory euphoria, aided and abetted by a sycophantic news establishment, helped to cement the new consensus. A full-scale ideological assault was mounted on the old postwar settlement. Overnight, Keynesian economics was consigned to the junkyard as this new social, political, economic, and cultural consensus took hold.

…

Today, in order to be a truly successful criminal, you have to be inside the system or a top-grade hacker.
3 For more detailed accounts, see Tariq Ali, Pirates of the Caribbean: Axis of Hope (London and New York, 2006); Richard Gott, Hugo Chávez (London and New York, 2005); Gregory Wilpert, Changing Venezuela by Taking Power (London and New York, 2007); David Smilde and Daniel Hellinger, eds, Venezuela’s Bolivarian Democracy (Durham, NC 2011).
4 ‘It was Costas Simitis, PASOK [Socialist] prime minister from 1996 to 2004, aided by Papademos at the central bank, who set the country on a course of sell-offs and deregulation, while also claiming to cut the deficit, lower labour costs and crush inflation, bringing the country into line with EMU convergence criteria and joining the euro in 2001. Financial deregulation had produced a frenzy of speculative activity, boosting the Athens stock market to unprecedented heights and transferring large quantities of wealth upwards to a newly financialized elite; euphoria rose higher still in the run-up to the 2004 Athens Olympics. In reality, as the world now knows, the deficit figures were rigged: Simitis and Papademos oversaw a fee of $300 million to Goldman Sachs to shift billions of euros of debt off the public accounts.

As memories of interwar instability faded, financial interests began to carry even greater weight in the shaping of economic policy. The Europeans and Japanese were willing to contemplate cooperative capital controls to bring some stability to foreign currency markets after 1973, but their demands were blocked by the United States.20 Policy makers in the United States and Britain increasingly advocated global financial deregulation, and they eventually gained an unlikely and crucial ally in France.
The impetus behind the French change of heart was the failure of a reflation program the Socialist president François Mitterrand had embarked on in 1981—the so-called “experiment of socialism in one country.”21 Financial markets had responded to Mitterrand by fleeing in droves, putting upward pressure on French interest rates.

…

Nothing comparable took place in the subsequent fifty years until the savings and loan crisis of the 1980s.21
This era of financial stability owed its existence to an uneasy accommodation between Main Street and Wall Street—between the real and financial sectors—following long centuries of experimentation. The quid pro quo took a simple form: regulation in exchange for freedom to operate. Governments brought commercial banks under a heavy dose of prudential regulation in return for providing public deposit insurance and lender-of-last-resort functions. And equity markets were encumbered with extensive disclosure and transparency requirements before they could develop.
The financial deregulation of the 1980s upended the bargain and ushered us into new, uncharted territory. Advocates of liberalization argued that supervision and regulation would hinder financial innovation, and in any case government agencies could not possibly keep up with the technological changes. Self-regulation was the way to go. A multitude of new financial instruments emerged, with strange acronyms and risk characteristics about which even the most sophisticated market players were ultimately clueless.

…

No one can doubt that banks became politically powerful in the United States, but in getting policy makers to do their bidding they received immense help from economists. The economists’ narrative gave intellectual cover to freeing up finance and convinced politicians that what was good for Wall Street was also good for Main Street. Beyond the United States, economists sparked a global push for financial liberalization, as we have seen. The French Socialists embraced financial deregulation not because of Wall Street’s influence but because their own technocrats had no other alternatives to offer. The IMF’s push for free capital flows was supported by the economics profession’s best minds.
Simon Johnson and other economists who had influence and held policy positions actively encouraged the process. I find it difficult to believe that they were the hired guns of the banking industry.

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Rethinking the Economics of Land and Housing
by
Josh Ryan-Collins,
Toby Lloyd,
Laurie Macfarlane,
John Muellbauer

Much remaining council housing was transferred to the housing association sector, largely driven by the political desire to keep official public sector borrowing down. The stage was set for the revival of the private rented sector by the Housing Act of 1988’s removal of rent regulation and introduction of the Assured Shorthold Tenancy. Under this new form of rental tenure, private landlords would be able to evict their tenants at will, without having to show grounds, and tenancies could be as short as six months.
Meanwhile, further financial deregulation drove a greater allocation of credit to house purchases, fuelling a new house price boom (see Chapter 5) that would burst spectacularly in 1990 when interest rates were raised to keep the value of the pound within the bands of the European Exchange Rate Mechanism.
Finally, in recognition that moving towards market housing would leave some people unable to adequately house themselves, the complex systems of individual housing subsidies were amalgamated and Housing Benefit was born (Malpass and Aughton, 1999).

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JOSEPH STIGLITZ (2015B, P. 439)
Civil government, so far as it is instituted for the security of property, is, in reality, instituted for the defence of the rich against the poor, or of those who have property against those who have none at all.
ADAM SMITH (1776, P. 167)
6.1 Introduction
In the last two chapters we have seen how a combination of ill-thought-out housing policy, changes in welfare and taxation and financial deregulation have resulted in land and housing in the UK becoming ‘financialised’. In this chapter we explore how this has interacted with two other key economic developments: the increasing role of housing as a source of wealth and the pattern of increasing economic inequality in most advanced economies.
Recent decades have seen housing wealth increase at a faster rate than other types of wealth, and considerably faster than national income.

…

Firstly, it means that the increase in the wealth-to-income ratio observed in Piketty’s data, which has underpinned the rise in inequality, has been driven not by productive activity, but rather by increasing residential land values which have manifested themselves through rising house prices. Put another way, this wealth has originated from windfalls resulting from exclusive control of a scarce natural resource in the face of rising demand from economic development, population growth and financial deregulation. As discussed in Chapter 3, the classical economists would have viewed this as an accumulation of unearned economic rent; a transfer of wealth from the rest of society towards land and property owners (George, [1879] 1979).
Secondly, the decoupling of wealth from the productive capacity of the economy points to asymmetries in the way that wealth is measured under modern national accounting frameworks.

The ex-designer, a mathematician and physicist named Victor Makarov, kept an eye on some of Chase's positions in 36 currencies, bonds, loans, stocks, and derivatives; his history, he says, made him especially risk-averse (Lipin 1994).
21. Volatility is measured by the standard deviation of yearly percentage changes; 1980 is as good a dividing time as any between the New Era and the Old. Interest derivatives began trading in 1977; stock derivatives in 1981; 1980 also marked the first bite of Volcker's sadomonetarism, was about the midpoint of financial deregulation, and was the eve of the Reagan transformation.
22. "Aristotle thought that only living beings could bear fruit. Money, not a living being, was by its nature barren, and any attempt to make it bear fruit {tokos, in Greek, the same word used for interest), was a crime against nature" (de Cecco 1992a).
23. Nearly half of the late 19th century in the U.S. was spent in periods of recession or depression; since World War II, only about a fifth of the time has been.
24.

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As financial popstar Andrew Tobias (1982) once argued, the insurance industry thrives on its reputation for dullness, which keeps prying eyes away from examining its wealth. So-called mutual life insurance companies, which are owned by their policyholders, are especially fat and obscure, because few small policyholders have the means or will to check out what "their" firm is up to with "their" money. Executives of such firms are among the most cosseted of a cosseted class, though financial deregulation is beginning to bite at the industry.
banks, commercial and investment
And now to the players that attract the most attention — commercial and investment banks and other star institutions that are synonymous with Wall Street. A striking feature of the general credit scene is that old-style banking has taken a backseat to "the markets." This is a matter of both numbers and style. From the 1950s through the mid-1970s, banks held an average of 28% of total credit market debt; at the end of 1997, their share had fallen to 19%.

…

Thrift pundit Robert Litan (1992) rejected popular explanations of the crisis, which center on "venality, greed and incompetence," out of professional discomfort. Instead, Litan preferred the terrain of conventional economics — inflation, interest rate volatility, moral hazard, real estate slump, and the rest — and, like a loyal economist, was eager to get deregulation off the hook.
PLAYERS
Of course inflation and the rest are to blame. But it would be impoverishing to stop there. Litan's fellow economists assured us that financial deregulation was supposed to release untold energies by liberating the self-adjusting mechanisms of the capital markets. Instead, it released imprudence, incompetence, and fraud throughout the entire system. As a Wall Street Journal piece on the thrift disaster noted, the list of malefactors is "so long that some observers conclude there is something profoundly wrong with the country's political and financial systems, which appear easily undone by feckless and reckless behavior.

As in the United States, the gains are skewed to the very tip of the pyramid: among the financiers who are part of Britain’s top 1 percent, the top 5 percent (or 0.05 percent of workers overall) take 23 percent of the total wages of that gilded slice of the population. The dominance of top dogs in finance is even stronger than that of the 0.05 percent in other jobs.
—
One reason the preeminence of the financiers within the global super-elite matters is that it highlights how crucial financial deregulation has been to the emergence of the plutocracy. That story has been told most convincingly in a historical study published in 2011 by economists Thomas Philippon and Ariell Reshef.
I first heard of the paper when a draft version of it was presented at the central bankers’ conference in Basel, a prestigious annual wonk fest for the world’s central bankers and the academic economists who are their intellectual groupies.

…

All of them have some impact, but they find that the change with the single greatest explanatory power is deregulation, which they calculate has driven nearly a quarter of the increase in incomes in finance and 40 percent of the increase in the education of workers in that sector. Volcker and his smartest classmates chose to become professors and civil servants. Today, many of Harvard’s smartest economists choose Wall Street.
Emerging market oligarchs who owe their initial fortunes to sweetheart privatizations are perhaps the most obvious beneficiaries of rent-seeking. But through financial deregulation, Western governments, especially in Washington and London, played an even greater role in the rise of the global super-elite. As with the sale of state assets in developing economies, the role of deregulation in creating a plutocracy turns classic thinking about rent-seeking upside down. Deregulation was part of a global liberalization drive whose goal was to pull the state out of the economy and let market forces rule.

…

What’s especially important about this study is that it documents the relationship between Wall Street and Washington before the 2008 financial crisis and subsequent multitrillion-dollar bailout. That rescue is what prompted populist anger on both right and left and claims, as Sarah Palin put it in an op-ed in the Wall Street Journal, that Washington had occupied Wall Street. But the real government capture actually happened in the three decades before 2008, with the long, steady, bipartisan rollout of financial deregulation.
—
Dani Kaufmann grew up in Chile. He was studying at Hebrew University when Pinochet seized power in a coup in 1973, and elected not to return, ending up instead at Harvard, where he eventually earned a PhD in economics. His next stop was the World Bank, where he worked on Africa and then, after the collapse of the Soviet Union, the transition to capitalism in what used to be the Warsaw Pact states.

The big-government interventionists of the day—Daniel Webster, Henry Clay, and other Whigs—denounced him, but he stuck to his principles. Rather than intervening, Van Buren fought for financial deregulation, ushering in the Independent Treasury System, a new national banking system under which all bank notes were redeemable in gold and silver. This financial deregulation produced what was arguably the most stable monetary system the United States has ever had.5 What bank losses there were stemmed from remaining state-level regulations, such as prohibitions on branch banking and requirements that banks purchase extremely risky and sometimes worthless state government bonds.
In addition to financial deregulation, notes historian Jeffrey Hummel, Van Buren “thwarted all attempts to use economic depression as an excuse for expanding government’s role.”6 Henry Clay and the Whigs (including a young Abraham Lincoln) viewed the depression as a political opportunity to get the federal government to enact their favorite pork-barrel schemes for “internal improvements,” which amount to corporate welfare for companies that built roads, railroads, and canals.

They find confirmation for Kindelberger’s identification of
credit expansion as a determining factor behind asset price bubbles. They point
out that historically asset price bubbles followed reforms, which led to credit
expansion such as financial liberalisation, fiscal expansion and relaxation of
reserve requirements. They cite Japan in the 1980s as an example of this
phenomenon.
The mechanism through which financial deregulation feeds into asset price
bubbles according to Alan and Gale is by exacerbating the agency problem.
Speculative investors with improved access to credit shift the risk to financial
intermediaries. This encourages them to bid prices even higher. Uncertainty over
monetary policy further exacerbates this dynamic. On the down side, banks
liquidate assets to meet demands, which further accelerates the negative bubble.

…

The East
Asian economies implemented foreign-encouraged programmes of financial
liberalisation in the 1980s, but did not adequately regulate and supervise their
liberalised financial systems.
Hamilton-Hart (2000) emphasises the different political pre-conditions
required for prudential supervision and financial liberalisation, which also entail
rather different administrative capacities. While the benefits of financial deregulation in the context of an open capital account are relatively concentrated, its
costs and risks are diffuse. And conversely, while the costs of compliance with
prudential regulation are concentrated, its benefits are diffuse.18 Hence, deregulation, at least in the financial sector, is politically easier to carry out than
prudential regulation. The private interests favoured prior to financial reform also
gained most from deregulation.19
While significant regulatory weaknesses persist, a financial sector is unlikely
to be simultaneously developed, liberalised and stable.

Johnston concluded that for every $1 of additional income earned by the bottom 99 percent of Americans since 1970, each member of these dynastic families received $7,500 additional; collectively, in 2000, these families received as much income as the poorest 96 million Americans.30
How We Got Here
America arrived here as a result of choices made at the polls; specifically the elections of Presidents Ronald Reagan, George H.W. Bush, George W. Bush, and (to a lesser degree) Bill Clinton. Not until the election of President Obama was an effort made to address at least some symptoms of Reaganomics like financial deregulation. But why would Americans make these earlier economically harmful choices?
Part of the answer rests with the nature of economic information. Economic results are slow to accumulate in the mind’s eye of voters. Excepting recessions, it takes many years before hindsight can actually distill fiction from facts about the quality of economic leadership.
And when the facts become clear sometimes years later, even well-informed voters have difficulty linking their plight to seminal trends such as the regulatory capture of Washington by the business community, or the devolution of the American executive suite culture.

…

In recent years, rampant front-running induced mutual, hedge, insurance, and pension funds seeking optimum prices to utilize Dark Pools, where their large block trades were presumably obfuscated and anonymous, allowing for more competitive pricing. Yet the certainty of trading gain proved too alluring; the Dark Pool exchange platform Pipeline Trading Systems was discovered front-running its own block traders and was fined by the SEC in 2011.80
The reality is that the discipline of market forces has proven no match for the practices that have proliferated in the wake of financial deregulation. Alan Greenspan called Wall Street bankers who exploited deregulation to conjure new financial products like subprime mortgages “pollinating bees” in his 2009 book, Age of Turbulence. Some of his pollinators’ products proved toxic to investors, who unfortunately still today have only modest recourse under the caveat emptor rules of American law, even in instances when they were denied critical information by broker-dealers or by rating agencies.

…

Indeed, economists Andrew Berg and Jonathan Ostry with the IMF have concluded that nations with less income disparity experience faster growth. Analyzing data from 1950 to 2006, they discovered that income equality is as important to growth as is openness to free trade. Nations with high-income equality experienced higher average rates of economic growth by avoiding disruptions such as credit crises that are precipitated when economic elites achieve financial deregulation.31
In family capitalism countries, gains from trade and economic growth are widely distributed. They met the challenges of globalization and technology change by opening borders to garner the enormous wealth from the improvement in resource allocations and efficiency. At the same time, they upskilled workforces and adopted institutions to ensure the gains would be broadcasted widely, not monopolized as in the United States.

On Wall Street and beyond, business could count on Republicans to be the party that, in the famous words of conservative patron William F. Buckley Jr., “stands athwart history yelling Stop.” Except, that is, when the party was standing athwart history yelling Full Speed Ahead. As the winner-take-all economy raced relentlessly forward in the first decade of the new century, Republicans promoted that development at every turn. Whether the lever was huge tax cuts, further financial deregulation, or lax oversight, the GOP was there to give a helpful push.
And the willingness to provide that aid was hidden right out in the open. Less than a month before his tumultuous victory in November 2000, George W. Bush had made a guest appearance at the Al Smith charity event in New York. At the $800-a-plate dinner, where Bush and Al Gore took turns offering self-deprecating jokes before a diamond-studded crowd of the economy’s biggest winners, the soon-to-be victor signaled what was to come with a wink: “This is an impressive crowd—the haves and the have-mores.

…

In the Clinton administration, Treasury Secretary Robert Rubin and his deputy (and, later, successor) Lawrence Summers headed a formidable cadre of Wall Street support. Rubin, of course, had come straight out of Wall Street, having spent the previous twenty-six years in the top echelons of Goldman Sachs. Summers was Rubin’s protégé and successor as treasury secretary, a fiercely brilliant economist who shared Rubin’s enthusiasm for financial deregulation if not his Wall Street pedigree.
The brief clash over derivatives provided a powerful example of what the two sides of Pennsylvania Avenue could do. By the late 1990s, concern over the massively expanding use of these new financial instruments was growing. Derivatives combined impressively varied forms of mischief—vastly expanded use of leverage, incredible opacity, and an ever-tightening web of invisible threads among firms—into a single perilous package.

…

The “congressionalist” structure reflected an appreciation for the politics of organized combat, an understanding that producing real changes in governance meant confronting the reality of deeply entrenched interests operating on favorable legislative terrain.12 The composition of Obama’s economic team reflected a different sort of concession to the reality of organized combat—a recognition that the delicate sensitivities of the winner-take-all economy demand their own accommodation. The key positions went to two veterans of the Clinton administration, Tim Geithner and Larry Summers. Of the two, Summers had the greater political experience, having served as treasury secretary (where, as we saw in chapter 9, he pushed for financial deregulation). But neither could be seen as a congressional favorite. Rather, they were respected figures within the mainstream of Democratic economic thinking with strong ties to Wall Street.
Of the two, Geithner’s Wall Street ties were the stronger. He had been offered the top spot at Citigroup (though “sorely tempted,” he declined).13 As head of the Federal Reserve Bank of New York in 2008, he had engineered the $182 billion bailout of the giant insurer AIG.

Deposit insurance would protect depositors; international agreements would ensure minimum standards for balance sheets (the Basel system of coordinating approaches to financial stability was launched in 1974); and the central banks were fully cognisant of their importance as lenders of last resort. Even if the occasional bank were to collapse, there was no reason for it to develop into a systemic run on all banks.
Financial deregulation was the universal panacea, promoted in developing countries just as much as in the West. Dismantling controls would enable them to overcome their cash-flow problems by drawing on the capital of the rich countries. The stronger the financial markets became, the more discipline they could impose on profligate governments and fat, monopolistic firms. Domestic savings would also be allocated better.

…

Turbo finance
The implosion of the Communist Bloc and the triumph of liberal capitalist democracy initiated a further intensification of globalisation and the high-water mark of the Washington consensus. However, although the main contours were agreed – rolling back the state, deregulation, balancing budgets, setting inflation targets, privatisation and generally extending the ‘magic of the market’, as Ronald Reagan had famously dubbed it – there was still room for debate. Some economists, such as Jagwad Bhagwati, had impeccable free trade credentials but still had doubts about financial deregulation. For them, free trade should have been first in the sequence of priorities; deregulating finance, on account of its attendant risk, last. But this was rapidly becoming heresy, despite the two recent British property crashes, the American savings and loans crisis, and a Latin American debt crisis. Nevertheless, while it may have made sense for any individual bank to promote the freedom to manage its balance sheet according to market signals and opportunities for profitable lending, there was clearly a problem of collective action.

…

So the delusional story that is told about any new boom era – the transformatory impact of mass production in the 1920s; the benefits of globalisation, ICT and financial innovation in the 2000s – always turns out to be false. The risks that were judged to be no risk turn out to be as risky as ever, even though everyone has bet that they were not. ‘Permanent improvements’ turn out to be mere by-products of the economic cycle.
There had already been storm warnings from around the financially deregulated world. The World Bank estimated that between the late 1970s and 2000 there were 112 systemic banking crises in 93 countries in the developed and the less developed world alike. This is far higher than the figure for the previous thirty (more regulated) years, and it imposed far higher fiscal costs. A quarter of these crises involved public debt rising by more than 10 per cent of GDP and another half approached 10 per cent of GDP.16 Yet the warnings were disregarded, even as it became obvious that deregulation resulted in a degree of instability that would eventually trigger a systemic Western banking crisis.

Desupervision helped make the industry ideal for control fraud. First, and most disastrously, Pratt froze and then reduced the number of examiners. This was a terrible mistake, but Pratt was not alone in making it. President Reagan’s first act was to freeze new hires. The Office of Management and Budget (OMB) wanted the Bank Board to reduce its examiners and supervisors. President Reagan appointed Vice President Bush to head his financial deregulation task force. Bush recommended that financial regulators rely more on computer analyses of industry financial statements and cut both the frequency of examinations and the number of examiners. Martin Lowy (1991, 36) says that Pratt fought with the administration for new examiners and was denied them.
The OMB went so far as to threaten Pratt with criminal sanctions if he didn’t obey its spending restrictions.

…

We were also lucky because the administration’s effort to give Keating control of the Bank Board failed and because Keating used Henkel so crudely that he could be removed from office before he could destroy reregulation. Henkel would have caused enormous damage if he had remained Keating’s mole.
We cannot afford to rely on luck. We have to take the selection of senior regulators more seriously. That requires us to discuss the role of the president in regulation. President Reagan failed in this role. His administration (and it is important to remember that Vice President Bush was in charge of financial deregulation) took the following actions:
• Insisted on deregulating at a time of mass insolvency
• Insisted on covering up the scope of the crisis
• Barred Pratt from briefing the cabinet finance committee
• Argued in favor of running insolvent S&Ls like Ponzi schemes
• Repeatedly cut the number of examiners
• Fought the agency’s use of the FHLB system to double the number of examiners and supervisors at no cost to the Treasury
• Opposed Gray’s efforts to reregulate
• Refused to allow the FSLIC to obtain any money from Treasury
• Tried to give Keating majority control of the Bank Board
• Appointed Keating’s mole, Henkel, to the Bank Board
• Accepted (through Bush) a $100,000 contribution from Keating even after Senator Riegle had returned his contributions in light of the Keating Five scandal
• Reappointed Henkel to the Bank Board after he tried to immunize Lincoln Savings’ violations
• Tried (through Don Regan) to embarrass Gray into resigning
• Threatened to prosecute Pratt and Gray for closing insolvent S&Ls
• Threatened to prosecute FDIC chairman Seidman for closing banks
• Reached a deal with Speaker Wright to support forbearance and not reappoint Gray
• Conducted a criminal investigation of the FHLBSF at Keating’s request
• Provided no White House support for the FSLIC recap until Gray left office
• Regan testified that while Gray warned of the coming crisis, he, Regan, ignored the warnings
• Not only did President Reagan never request a briefing from Gray about the debacle, but they never discussed it personally after Reagan appointed Gray
• President Bush insisted on appointing Wall as director of the OTS without the advice and consent of the Senate, which was ruled unconstitutional
• Bush appointed Wall OTS director even after he had appeased Keating
10.

…

This policy incoherence was characteristic of Pratt’s tenure. His motif was to do everything possible for the industry even if the components were logically inconsistent.
8. Ed Kane (1985), however, predicted very early that the industry was headed for disaster, but he did not tie that accurate prediction to opposition to deregulation.
9. This political risk extended to Vice President Bush, for he was Reagan’s head of financial deregulation.
10. For example, our analysts knew that the Soviet Union was deploying nuclear missiles in Cuba because our U-2s spotted the characteristic pattern of antiaircraft defenses the Soviets always used for nuclear missiles.
11. The same thing happened to the SEC in the 1990s. It became so short-staffed that it never knew a wave of control frauds had hit. It never identified patterns of conduct indicating that fraud was likely.
12.

In the UK output fell by
5 points over this period.229
Not only has the world experienced more and deeper recessions, the crises of
recent times have had very different origins. Earlier post-war dips (mild as they were
by comparison) were triggered by deflationary policies needed to get inflation under
control (as was that of 1980-1982). The most recent recessions have nothing to do
with inflation or soaring wage demands. They have much more to do with rising asset
prices driven by excess profits and unsustainable credit, fuelled by financial
deregulation.
This has also been the main cause of the upsurge in financial crises, most of them
associated with a torrent of currency, stock or property speculation. In the two
decades from 1950 there were no banking crises and relatively few financial crises.
Since the end of the 1970s, the number of such crises has mushroomed. As the
Financial Times columnist, Martin Wolf, has put it, ‘financial liberalisation and
financial crises go together like a horse and carriage’.230 In October 1987, the world’s
leading stock markets crashed, their largest fall in a day since the crash of 1929.

…

From the 1930s through to the end of the 1970s, there were virtually no
bank failures while income inequality fell. From the early 1980s, the pattern of the
1920s was repeated. Income inequality rose along with the incidence of financial and
banking crises. ‘I could hardly believe how tight the fit was—it was a stunning
correlation,’ Moss told the New York Times. ‘And it began to raise the question of
whether there are causal links between financial deregulation, economic inequality
and instability.’240
Of course, as Moss has accepted, correlation is not the same as causation. As one of
his critics, R Glenn Hubbard, dean of the Columbian Business School and top
economic adviser to former President George W Bush has put it, ‘Cars go faster every
year, and GDP rises every year, but that doesn’t mean speed causes GDP.’ 241 The
correlation could mean that the direction of causation is from slump to inequality.

…

It also came with
political sanction. The finance industry—in both the UK and the US—has been
encouraged to extend lending further and further down the income scale. As shown in
the next chapter, such encouragement has been part of the wider political response to
the shrinking income base amongst large sections of the working population.
Until the early 1980s, all forms of lending were tightly controlled in the UK. Before
financial deregulation, the great majority of mortgages were provided by Britain’s
long established building societies. Most of these mutual organisations had been born
in the nineteenth century in response to the Victorian self-help ethic to encourage
savings and run for the good of their members. These controls involved rules
governing mortgage lending from the size of deposits and interest rates to the ratio of
loans to income.

pages: 1,242words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan
by
Sebastian Mallaby

It was Jimmy Carter, a Democrat, who got rid of the last vestiges of interest-rate regulation for banks. It was Bill Clinton, another Democrat, who signed the banking reform of 1999 that ratified the breakdown of the Depression-era separation between banks, insurers, and securities houses. It was, for that matter, a global club of technocrats who, in setting rules for bank capital, deferred to banks’ own risk models, effectively handing the teenagers the keys to the Mercedes. To paint financial deregulation as the product of some right-wing conspiracy is laughably off the mark. Intelligent people were grappling with deep forces driving financial evolution and making the best judgments they could. The sincerity of their purpose makes their errors all the more illuminating.
One of the virtues of biography is that it allows readers to understand decision making as it really is—imperfect, improvised, contingent upon incomplete information and flawed human nature.

…

If a monopoly extracted fat rents from its customers, its share price would soar; that would give entrepreneurs an incentive to create rivals to the monopoly, and it would give financiers an incentive to ply those rivals with abundant capital. The best guarantor of competition, Greenspan argued, was not the antitrust enforcement beloved by statists. It was the emergence of increasingly vibrant capital markets, which should be further encouraged with financial deregulation.
Greenspan’s skepticism about antitrust enforcement was shared by many leading intellectuals of the era. But what distinguished Greenspan’s contribution was its sweeping style—he had leaped the entire length of the continuum between intellectual caution and polemical audacity. In The Constitution of Liberty, published in 1960, the libertarian icon Friedrich Hayek had argued that government attacks on monopolies could do more harm than good; but he qualified his position by conceding that monopolies did cause abuses.38 Two years later, in Capitalism and Freedom, Milton Friedman adopted a similarly nuanced position, conceding that antitrust legislation might be welcome.39 Greenspan’s Alice-in-Wonderland barrage was altogether cruder: “The entire structure of antitrust statutes in this country is a jumble of economic irrationality and ignorance,” he stated flatly.

…

High stock prices anticipated surges in investment not only for the economy as a whole, but also within industries; moreover, the time between stock price rises and jumps in capital expenditure was short, reflecting the power of the association that Greenspan had identified. If price signals from financial markets could drive shifts in the real economy so rapidly despite extensive regulation of finance, it followed that financial deregulation could make the transmission even slicker, so that capital would flow to the corners of the economy that would use it most productively.18 After Greenspan completed his presentation, the research chief at the Wall Street brokerage Van Alstyne, Noel pronounced himself impressed. He asked Greenspan to stay in touch. Perhaps they could have lunch together?
What with Greenspan’s travels, it took a little while for the two men to get together.

Hundreds of billions of precious American savings were wasted.
The new age started with Walter Wriston, the most innovative, aggressive, and admired of the nation’s commercial bankers, head in the 1970s of First National City Bank, later Citicorp. He was an adamant believer in laissez-faire economics—minimal government intervention. He revolutionized banking by circumventing and often ignoring New Deal regulations. Financial deregulation started with him, but three times in thirty years the bank he built nearly went out of business due to the hundreds of millions of dollars of bad loans it made, saved only by federal intervention. The story of Citibank runs through this entire history.
Not all those who are the principal focus of a chapter were blatant practitioners of greed—some not at all. Tom Peters, the famed management consultant, was much the opposite.

…

The anti-inflationary policies were adhered to too firmly, and contributed significantly to slower rates of growth, higher levels of unemployment, the disappointing growth rate of productivity until the late 1990s, and stagnating wages. Extreme speculative excesses arose in other areas while Friedman’s anti-inflation heirs were in charge—in high-technology stocks in the late 1990s and mortgage finance in the 2000s, to take but the starkest examples. Friedman’s assurance that financial deregulation would work turned into an empty promise, with disastrous consequences. Since the early 1980s, the financial markets have been far more unstable than in the 1950s and 1960s. There had been dissenters among mainstream economists who thought the inflation target was too low, but their advice went untaken by those running policy. By 2010, this was changing. Economists at the International Monetary Fund, for example, suggested the annual target for inflation could be raised from 2 percent to 4 percent.

…

Kahn, who had first worked in the New Deal, had developed an expertise in government regulation as head of the New York Public Service Commission, where he introduced market-oriented reforms. Under Kahn, and with Kennedy’s support, airline fares were deregulated in 1978, and by 1980 trucking and railroads were also deregulated. Guided by the same principles, Carter also wanted to deregulate banking by eliminating Regulation Q. Wriston’s ultimate wish was coming true under a Democrat. Although Kennedy did not support financial deregulation, the Democratic Party was turning into the political party of high finance. Carter was consistent about this deregulatory ideology, and he prevailed.
The economy suddenly appeared to be weakening again toward the end of 1977. Now Schultze, largely endorsed by Carter, urged a new stimulus, a $25 billion set of tax cuts, three quarters of which would benefit individuals. The proposal also sought to close tax loopholes for upper-income taxpayers, a favorite concern of Carter’s.

But that kind of transforma tion could succeed only as part of a broader transformation of financial relations that would include, as a start: the establishment of nonprofit banks that would provide low-cost checking and savings accounts as well as low-interest loans for community and regional development; tight regulation of the existing for-profit banks; taxes on securities trading to cool speculative fevers; tight controls on international capital flows; reform of corporate boards to include worker, community and public sector representatives; a radically new approach to the management of pension funds; and a wealth tax that would simultaneously reduce the influence of the moneyed and provide funds for a vast rebuilding of our social and physical environment.
Short of these reforms—which, it must be emphasized, would be taken by Wall Street as revolutionary—reform of the Fed alone would turn out to be little more than cosmetic.
Breaking Glass-Steagall
E D I T O R S O F T H E N AT I O N
November 15, 1999
Although wall street has pushed for financial deregulation for two decades, it was last year’s merger of Citicorp and Travelers that set the stage for Congress’s effective revocation of the Glass-Steagall Act in late October. The merger was a violation of the longstanding laws separating banking and insurance companies, but Citicorp and Travelers, because they well knew their power to ram deregulation through Congress, exploited loopholes that gave them a temporary exemption.

…

Fox News’s Stuart Varney explained that Larry Summers, who held the post under Clinton, and former Fed chair Paul Volcker would both “give great confidence to the market.” We learned from MSNBC’s Joe Scarborough that Summers is the man “the Street would like the most.”
Let’s be clear about why. “The Street” would cheer a Summers appointment for the same reason the rest of us should fear it: because traders will assume that Summers, champion of financial deregulation under Clinton, will offer a transition from Henry Paulson so smooth we will barely know it happened.
Someone like FDIC chair Sheila Bair, on the other hand, would spark fear on the Street—for all the right reasons.
One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations.

Nigeria does not need to spend time and effort building land phone lines, nor does it need to invent cell phone technology. It can ignore the old technology and simply imitate Nokia, setting up a cell phone factory itself. Third, and somewhat novel, is a reason that has to do with institutions. As countries integrate, they also come to know better what type of institution works best. Suppose that we all agree that it involves strong protection of property rights and financial deregulation. Then, poor countries that generally have less “efficient” institutions will again benefit more because they will be able to imitate the better institutions of the rich world.
We have seen in Essay II that these simple predictions were found quite wrong when it came to explaining the growth of the world during Globalization 2.0. This fact is by now generally acknowledged, and alternative theories of economic growth have been proposed to account for it.

…

Actually, one of the greatest draws to soccer lay in the unpredictability of its outcomes, its replication of life5—namely, the combination of deserved wins of a “better” team with random outcomes where an obviously weaker side would, by a stroke of luck or sudden inspiration, overwhelm a Goliath. Today, as the gap between the Goliaths and Davids is much greater than ever, surprises are much less likely to happen. Goliaths always win; moreover, they often do not deign to play with Davids.
Vignette 3.6
Income Inequality and the Global Financial Crisis
The current financial crisis is generally blamed on feckless bankers, financial deregulation, crony capitalism, and the like.1 Although all of these elements may have contributed, this purely financial explanation of the crisis overlooks its fundamental reasons. They lie in the real sector, and more exactly in the distribution of income across individuals and social classes. Deregulation, by helping irresponsible behavior, just exacerbated the crisis; it did not create it.
To understand the origins of the crisis, one needs to go to rising income inequality within practically all countries in the world, and the United States in particular, over the past thirty years.

The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg)
by
Liam Vaughan,
Gavin Finch

The BBA established a panel of banks
that would be polled each day and tweaked the original formula to strip
out the bottom and top quartile of quotes to discourage cheating. Otherwise the rate looked similar to the one first conceived by Zombanakis.
In the quarter-century between then and Hayes’s time at UBS, the suite
of currencies was expanded to 10 and the process became electronic, but
not much else changed.
The same could not be said of the U.K. banking industry, which was
transformed by Prime Minister Margaret Thatcher’s “Big Bang” financial deregulation program of 1986. Overnight, Thatcher cleared the way
for retail banks to set up integrated investment banks that could make
markets, advise clients, sell them securities and place their own side bets,
all under one roof. She also removed obstacles to foreign banks taking
over U.K. firms, leading to an influx of big U.S. and international lenders
that brought with them a more aggressive, cutthroat ethos.

The paper concluded that most of the time the economists did not reveal possible conflicts of interest or private industry affiliations when they should have.50
One of the more shocking examples of such conflicts of interest was unveiled in the Oscar-winning 2010 documentary Inside Job,51 which examined the policy decisions that led to the financial crisis. Filmmakers profiled Columbia University economist and business school dean Glenn Hubbard, formerly the chief economic adviser to the George W. Bush administration, interviewing him about his role in financial deregulation as well as various private sector associations that may have encouraged him to take a more finance-friendly view to policy issues. These associations included, among others, working as a $1,200-an-hour consultant for Countrywide Financial (a mortgage lender that was deeply involved in the subprime crisis and had to be bailed out by the Fed) and getting paid $100,000 to testify in the defense of Ralph Cioffi and Matthew Tannin, two Bear Stearns hedge fund managers who were prosecuted (and later acquitted) for fraud.52 Hubbard had also coauthored a Goldman Sachs report in 2004, entitled “How Capital Markets Enhance Economic Performance and Facilitate Job Creation,” in which he said that credit derivatives were protecting banks from losses by redistributing risk.

…

HOW TO FIX THE SYSTEM
So, until tax and other market and governance reforms happen, look for this type of corporate financial wizardry to continue. As economist Joseph Stiglitz and others have pointed out, fixing things like the buyback dilemma is tough, because it’s not a matter of finding a silver bullet. As I have sketched in this chapter, the Kafkaesque financial market dysfunction exemplified by the share buyback boom is the result of more than thirty years of policy decisions and market shifts—from legal changes to financial deregulation to the privatization of retirement to easy-money monetary policy and terrible incentive structures for corporate leaders. There’s no one fix that will change the system overnight. But there are several smart things we could do to start moving toward that change.
One solution that has been proposed to create a more equal distribution of corporate wealth is cash profit sharing, an idea put forward by Joseph Blasi, a professor at Rutgers University’s School of Management and Labor Relations.

…

There isn’t a lot of new real estate development in such places, but there’s a lot of buying and selling of existing property, which creates rising asset values but doesn’t add too many jobs. Real estate buying and selling is thus particularly vulnerable to financialization cycles, because we’re basically talking about money staying within that closed loop.43 That’s one of the reasons that real estate regulation needs to be crafted much more carefully, as I will explore in chapter 11.
As we saw earlier in the book, many of the major pushes for financial deregulation on the part of the banking industry in recent times have been done with an eye to increasing the amount of business that finance can do in the housing sector. As academics Charles Calomiris and Stephen Haber meticulously outline in their book, Fragile by Design: The Political Origins of Banking Crises & Scarce Credit, the subprime crisis itself was “the outcome of a series of spectacular political deals that distorted the incentives of both bankers and debtors.”44 Unfortunately, nothing about this paradigm has changed—indeed, things have arguably gotten worse.

But no other sector exhibits the “rentier” tendency as dramatically as finance. For centuries, financiers have found ways—lobbying for a regulatory loophole, say, or devising a technology so complex, or a technique so arcane, that no one else understands it—to extract a larger profit than would otherwise be necessary to persuade the financiers to perform the socially essential function of finance. (It’s hardly coincidental that during the 1990s, as financial deregulation and financial technologies were just ramping up, the median compensation for investment bank executives, which until then had been on par with compensation at other companies, leapt ahead by a factor of between seven and ten.29) And like some black hole, as finance’s surplus has grown, so, too, has the distortion of the economy as steadily more resources are pulled away from sectors that are arguably more socially productive yet don’t offer returns that are as competitive.

…

At the same time, the absence of a left wing has allowed the Democratic Party to become far more comfortable with practices once associated mainly with the right, such as pumping corporate donors for campaign funds and befriending Wall Street. “Democrats have found it easier to forge relationships with the conservative worlds of big business and high finance,” Beinart notes, “because they have not faced much countervailing pressure from an independent movement of the left.”37 In a sense, financial deregulation and the mess that followed were a direct result of the left’s more self-centered politics. So focused was the left on self-expression and personal fulfillment that it largely neglected its historic function: keeping government from falling totally in the thrall of the marketplace and the blind march for efficiency.
The Tea Party, by contrast, suffered no such absence of support. From the moment of its inception, the revolution on the right found a warm reception from the conservative political machine that was much more geared for action—and vastly better funded—than anything on the left.

Household Indebtedness: Causes and Consequences,” 2007-37.
17 As Frederic Mishkin: “Housing and the Monetary Transmission Mechanism,” presented at the Economic Symposium of the Federal Reserve Bank of Kansas City, Housing, Housing Finance, and Monetary Policy (2007): 393, available at http://www.kc.frb.org/Publicat/Sympos/2007/PDF/Mishkin_0415.pdf.
18 Brad DeLong, an economist: J. Bradford DeLong, “Confessions of a Financial Deregulator,” Project Syndicate, June 30, 2011, available at http://www.project-syndicate.org/commentary/confressions-of-a-financial -deregulator.
19 One evening in February 2005: Paul Volcker, “Remarks to the Stanford Institute for Economic Policy Research” (author’s transcript), February 11, 2005.
20 “I wanted to flag it”: Interview with the author.
21 “History has not dealt kindly”: Alan Greenspan, “Reflections on Central Banking,” Aug. 26, 2005, available at http://www.federalreserve.gov/Boarddocs/speeches/2005/20050826/default.htm.
22 “Even before the crisis”: Bernanke’s crisis preparations are based on an interview with me after he retired, and on my article “Bernanke, in First Crisis, Rewrites Fed Playbook,” Wall Street Journal, October 31, 2007.
23 rarely did any of these seem important enough: Stephen Golub, Ayse Kaya, and Michael Reay, “What Were They Thinking?

Subsequently a number of other countries including France
switched to much wider bands of permitted fluctuation against the core currency in the system, the Deutschemark. Many commentators in continental
Globalism and Globaloney
167
Europe blamed the ERM crisis — soon named ‘Black Wednesday’ in Britain —
on ‘Anglo-Saxon speculators’. In their eyes it was the untrammelled power of
international financial markets, unleashed by financial deregulation in the US
and UK, which had torpedoed the centrepiece of European monetary arrangements after more than a decade of careful construction and management.
One of those speculators, who started the run that was estimated to have
cost the British taxpayer more than £10 billion in the futile attempt to prevent a sterling devaluation, was George Soros. Anglo-Saxon only in the sense
that he and the managers of his investment vehicle, the Quantum Fund, are
based in the US, the Hungarian-born financier is a fervent supporter of the
European project.

…

There are those who claim
the unprecedented degree of globalisation of international markets, both financial markets and markets for goods and services, has transformed the world.
Companies face a new headwind of international competition, to a degree
unimaginable two decades ago. The ability to transfer millions of dollars worth
of funds at the touch of a key has transferred power from governments to
financiers. Deregulation and technology have combined to change things
utterly.
Then there are those to whom this is just so much globaloney. As discussed in Chapter 3, international trade and investment have grown steadily
since World War II, but are nowhere near recovering the peak, in relation to
the size of the world economy, that they attained at the turn of the last century. Information and communications technology make it possible now to
transfer huge sums in seconds, but it only took perhaps three or four hours
by telegraph in the Edwardian era.

This extraordinary build-up of speculative activity can be explained
by three cumulative changes over the past decades:
1 A Structural shift: On August 15, 1971, President Nixon
disconnected the dollar from gold, inaugurating an era of currencies
whose values would be determined predominantly by market forces.
This gave rise to a systemic change in which currency values could
fluctuate significantly at any point in time. This was the beginning of
the 'floating exchanges' and a market that would prove highly
profitable for those who know how to navigate it.
2. 1980s financial deregulation: The governments of Margaret
Thatcher in the UK and Ronald Reagan in the US embarked
simultaneously on massive financial deregulation programmes. The
Baker Plan (a reform package named after the then US Secretary to
the Treasury, Mr Baker), imposed a similar deregulation in 16 key
developing countries in the wake of the developing countries' debt
crisis. These deregulation’s enabled a much larger array of people
and institutions to become involved in currency trading than would
have previously been possible.
3.

pages: 403words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
by
Kate Raworth

They create money from nothing each time they issue loans – recording on their books both a liability (since the loan is withdrawn by the borrower) and a credit (since the loan will be repaid with interest over time). Such credit creation is hardly new – it started several thousand years ago – and it can play a valuable role, but it has grown hugely in scale since the 1980s. That expansion was triggered by financial deregulation (think reregulation) – including the 1986 Big Bang in the UK and the 1999 repeal of the Glass–Steagall Act in the US – which ended the requirement for banks to keep customers’ savings and loans separate from their own speculative investments.
Second, financial markets do not tend to promote economic stability, despite the claims that they do. Thanks to financial deregulation, said US Federal Reserve Chair Alan Greenspan in 2004, ‘not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.’45 Four years later, the financial crash disproved that claim in a fairly decisive way.

pages: 443words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by
Guy Standing

The argument was that, if left alone, financial markets would reward efficient firms and punish inefficient ones, which would go out of business; meanwhile, financiers could help with mergers and transfers of ownership to the more efficient. This reasoning also bolstered demands for the privatisation of state enterprises, which was soon embraced with almost as much enthusiasm by social democratic parties as by their right-wing opponents – witness the French socialist government of Lionel Jospin and the New Labour government of Tony Blair.
It was soon evident that the effects of financial deregulation were nothing like the predictions of neo-liberal theory. Instead of channelling money from savers to productive investments, financiers indulged in a frenzy of speculative activity to make money from interest, commissions and capital gains. The result was an unstable bubble economy, as investor ‘herds’ moved en masse from place to place. The titans of finance became ‘masters of the universe’, in Tom Wolfe’s famous phrase in The Bonfire of the Vanities, his 1987 novel satirising Wall Street, as they mingled with heads of state and spent time in senior government posts before returning to make yet more money from speculation.

The disaster was, in this sense, a perfect test of the conservative state, in which its trademark features were each tried and found to be as worthless as the mortgage-backed securities moldering in Citibank’s basement.
The landmark deregulations that made the whole mess possible to begin with were tributes to lobbyist power and the allure of the revolving door. Securing the great financial deregulation act of 1999, which permitted the megabanks that would be judged “too big to fail” nine years later, had been the object of decades of bank industry lobbying. When the man who finally got the bill passed, Texas senator Phil Gramm, left Congress, he promptly got a job as an investment banker. Gramm also co-sponsored the great financial deregulation act of 2000, which closed off the possibility of regulating futures and derivatives—the instruments that brought down Enron shortly thereafter and just about everybody else later on—although according to one knowledgeable account it was largely written by a financial industry lobbyist.2 Phil Gramm’s wife, incidentally, had been an ardent foe of futures regulation in her own right when she worked in the Reagan administration; she went on to serve as an Enron board member and then as a professor at the Mercatus Center, the Northern Virginia think tank dedicated to assailing regulation by whatever weapon presents itself.

When combined with the implicit and explicit promise to bail out failure, it encouraged a radical increase in risk that ultimately blew up the economy.
So what explains this foolish decision? What explains the power of these deregulatory ideas? Even Alfred Kahn, the architect of the very first deregulatory initiative during the administration of President Carter, could only shake his head decades later at the race to financial deregulation. Banks, he insisted, “were a different kind of animal…. They were animals that had a direct effect on the macroeconomy. That is very different from the regulation of industries that provid inl out alled goods and services…. I never supported any type of deregulation of banking.”50 So why did everyone else, including supposedly progressive Democrats?
There is no simple answer. As I’ve argued, the ideology of deregulation flowed for many as a matter of principle.

…

Alan Greenspan, for example, truly believed that markets would take care of themselves, that even regulations against fraud were unnecessary. Greenspan was wrong. He admitted as much. But he was not being guided by an improper dependence upon money. These were the beliefs of a true believer at work. They were not the beliefs of a hired gun.
And not just Greenspan: there were plenty in the army of financial deregulators who were true believers, not just mercenaries. It may well be, as John Kenneth Galbraith puts it, that “out of the pecuniary and political pressures and fashions of the time, economics and larger economic and political systems cultivate their own version of truth.”51 But these “versions” are still experienced as “versions of the truth,” not outright fraud. “No conspiracy was necessary,” as Simon Johnson and James Kwak put it in their 2010 book, 13 Bankers: “By 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America.”52 As Raghuram Rajan writes, “Cognitive capture is a better description of this phenomenon than crony capitalism.”53
Still, pure ideas are not the whole story.

In 1999, Clinton signed into law the Gramm-Leach-Bliley Act (aka the Financial Services Modernization Act), which allowed commercial banks and investment banks to combine and form vast financial supermarkets. Lawrence Summers, a leading Harvard economist who was then serving as Treasury secretary, helped shepherd the bill through Congress. (Today, Summers is Barack Obama’s top economic adviser.)
Some proponents of financial deregulation—lobbyists for big financial firms, analysts at Washington research institutes funded by corporations, congressmen representing financial districts—were simply doing the bidding of their paymasters. Others, such as Greenspan and Summers, were sincere in their belief that Wall Street could, to a large extent, regulate itself. Financial markets, after all, are full of well-paid and highly educated people competing with one another to make money.

…

“There is no doubt that Greenspan has been an amazingly successful chairman of the Federal Reserve System,” Alan Blinder, a Princeton economist and former Fed governor, opined. Raghuram G. Rajan, an economist at the University of Chicago Booth School of Business, who was then the chief economist at the International Monetary Fund, took a more critical line, examining the consequences of two decades of financial deregulation.
Rajan, who was born in Bhopal, in central India, in 1963, obtained his Ph.D. at MIT, in 1991, and then moved to the University of Chicago Business School, where he established himself as something of a wunderkind. In 2003, his colleagues named him the scholar under forty who had contributed most to the field of finance. That same year, he took the top economics job at the IMF, where he stayed until 2006.

Part of this was necessary to fuel the sector’s workaday needs and ambitions—from ensnaring college students through credit-card come-ons or peddling mortgages with initial low payments—but much more of the borrowing funded grand strategies of credit derivatives, leveraged buyouts, or the ability of institutions to take positions with 30:1 leverage. This meant $30 million borrowed dollars in play for every million actually owned. The cheaper the interest rate, the better.
One facet of the quarter century multibubble worth some amplification is how the three U.S. speculative binges born out of booms and financial deregulation—in 1984-1989, 1996-2000, and 2003-2007—each created so much excess, corruption, misjudgment, and threatened (or actual) insolvency that the Federal Reserve had to come to the rescue. Its usual technique was to drop interest rates as low as possible—in 1989-1992, 2001-2005, and 2007-2009. This gave the shaky and hungover financial institutions in particular a chance to get new funds for almost nothing and to loan them out at 8 percent, 12 percent, or even 25 percent (via credit cards).

…

You can intimidate everybody.”15
Clinton, somewhat like conservative Democratic president Grover Cleveland at the height of the late-nineteenth-century Gilded Age, slowly drifted into the orbit of New York finance. He got along well with the Republican chairman of the Federal Reserve Board; promoted Rubin to treasury secretary; raised a lot of reelection money on Wall Street (which, as we will see, was also becoming more Democratic); joined with Citigroup chairman Sanford Weill, an active Democrat, to promote the sweeping federal financial deregulation act of 1999; exulted over the rocketing stock market averages; gravitated to resorts like the Hamptons and Martha’s Vineyard; and on the occasion of one visit found himself hailed by a Hamptons chronicler who called the ebullient president “the spirit of the bull market.” Before leaving the White House in 2001, Bill and Hillary Clinton moved their residence to New York, where Mrs. Clinton had won a U.S.

The Unelected “Architects of Policy”
March 10, 2010
Shifts in global power, ongoing or potential, are a lively topic among policymakers and observers. One question is whether (or when) China might displace the United States as the dominant global player, perhaps along with India.
Such a shift would return the global system to something like it was before the European conquests. Economic growth in China and India has been rapid, and thanks to their having rejected the West’s policies of financial deregulation, they survived the recession better than most. Nonetheless, questions arise.
One standard measure of social health is the U.N. Human Development Index, available most recently through 2008. India ranks 134th, slightly above Cambodia and below Laos and Tajikistan, about where it has been for many years. China ranks 92nd—tied with Belize, a bit above Jordan, below the Dominican Republic and Iran.

But placing certain public companies under private control often led to a profound restructuring of their
activity, the number of people they employed, and their
geographic footprint, which in turn had dramatic effects
on particular social groups and regions.
Two kinds of measures deserve a more in-­depth analysis,
given that they have had a clear and significant impact on
distribution: financial deregulation and the deregulation
of the labor market.
The Deregulation and Globalization of Finance
The boom in the financial sector that characterized the last
two or three decades was the result of several factors. At the
macroeconomic level, the disinflation that took place at
the beginning of the 1980s re-­energized financial markets
by eliminating a major source of uncertainty about the cost
of and the real return on capital.

Bureaucrats and regulators were either captive to special interests or incompetent—and sometimes both at once. The less they did, the better. And in any case, financial markets were now so sophisticated that any effort at regulating them was futile. Financial institutions would always find a way around the regulations. Government was condemned to follow one step behind. Such thinking by economists had legitimized and enabled a great wave of financial deregulation that set the stage for the crisis. And it didn’t hurt that these views were shared by some of the top economists in government, such as Larry Summers and Alan Greenspan.
In sum, economists (and those who listened to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation improves the risk-return trade-off, self-regulation works best, and government intervention is ineffective and harmful.

This was the first
time a collection had been formed specifically for that purpose due to the adverse
economic climate. At the end of 1974 in the UK inflation and tax were high, stock
and property markets had fallen heavily, the pound was weak, exchange controls
were in operation and index-linked gilts were unavailable. Advised by Sotheby’s,
the fund made 2,525 purchases across a wide range of art sectors. However, political
pressure, along with 1980s financial deregulation, a booming stock market, high
costs and lack of any accurate measure for art precipitated the fund’s gradual art
sales after 1987. In 1989 a quarter of the art was sold, indicating a better return than
property and a worse performance than equities. By 1997 the fund had yielded a real
annual return of 4.3 per cent, including 11.9 per cent for Impressionist and modern
art and 7.7 to 8.5 per cent for Chinese works of art.

It made the American role less visible to both the country
being saved and, most importantly, to the U.S. public.
What the system never envisioned was that the U.S. financial system itself would be the source of a crisis that infected all of the other
financial systems of the world
6
t
THE LIMITS OF FINANCIAL
REGULATION
It is a common and perverse myth of partisan politics that it was the
financial deregulation—something that gained momentum in the
United States during the 1980s and 1990s and was largely complete
before the Bush years—that led directly to the 2008 crisis. A more
accurate depiction of things is that deregulation, like regulation, is a
trailing rather than a causal factor. Deregulation, such as it was,
largely occurred because the U.S. financial system was already in the
midst of a jailbreak.

The abolition of exchange controls in 1979 and the increasingly international flow of capital, combining with the abolition of restrictions on trading practices which culminated in the “Big Bang” in 1986, have all led to the City’s increasing dominance of British economic life. The Big Bang in turn caused the “Wimbledonization” of the City, making it a place where most of the major players were foreign. As for the Big Bang, it consisted of a series of rule changes which boiled down to one simple thing: the biggest act of deregulation the financial sector had ever seen.
Because financial deregulation has been a primary culprit in the current crisis, there’s a temptation to act as if it is inherently a bad thing. You need a short memory to think that. I grew up abroad and can vividly remember what a pain in the backside things such as currency restrictions were. When Margaret Thatcher came to power, you couldn’t take more than £500 out of the country at any one time—a restriction which now seems as distant as that of whalebone corsetry.

It is when low interest rates create inflation that a threat of recession looms, because the Federal Reserve will be motivated to raise interest rates in order to break the inflation; that was the cause of the severe 1980—1982 recession. That low interest rates might cause a credit binge that would cause a recession and even a depression was off the policy radar screen, in part because the synergistic effect of cheap credit and financial deregulation was missed. It was like winning World War II and being blindsided by guerrilla warfare in Vietnam. The United States had had plenty of experience with such warfare in earlier days, notably in the Philippines, but that seemed ancient history, as did the Great Depression —until a few months ago.
So there is blame aplenty to go around and there are also the adventitious factors that I mentioned earlier —the timing of the crisis in relation to the presidential campaign and transition and the Christmas shopping season.

The powers of the Entente were victorious in World War I because they could finance their war effort by selling bonds in their global financial centers, such as Paris, London, and New York, while the Germans had to rely on their own resources.
The liberalization of financial markets, for example, through competition among private banks and through open stock markets, seems to increase investment and raise productivity in an economy. The largest effect is due not to increased saving but to the fact that more capital ends up where it has the most impact. American studies show that the U.S. states that implemented the most financial deregulation in the 1970s are those that have since enjoyed the fastest growth. Research shows that the level of development that a country's financial markets had attained in 1960 was very important to its subsequent growth. A developing country that doubles the amount of private capital available to business and industry will increase its GDP by almost 2 percent per year. This means that, in 35 years' time, a country that does what it takes to make markets that liquid may be twice as rich as a country that is equally poor today but that does not take the action required.'

‘That is why you need strong people in risk and compliance.’
Was the middle office strong enough to resist this pressure? Well, he answered evasively, ‘a lot has changed since the 1970s. Overall finance has become much more meritocratic and diverse. On the negative side, the sector as a whole has become relentlessly focused on profit, and out to screw the customer. Much of banking is best done as a public utility. Let’s say I’m not a fan of financial deregulation.’
I asked about the crash and he explained with a distinct sense of pride that his team had seen the implosion of the American housing market coming. ‘What we didn’t catch was just how awful it would be.’ They had assumed that, thanks to the new generation of complex financial products, risks had been spread over so many points that the system as a whole was stable. He remembered, ‘as if it were yesterday’, sitting in his office with his colleagues in 2008 and seeing another institution’s share price collapse.

And this shift was anything but accidental—a political thriller of a story that we’ll visit in the next chapter. For now, let’s stick to how the views of the rich and the working class diverge significantly on fundamental economic issues, and how the affluent almost always win in this tug-of-war.
There’s a saying in Washington, D.C., that if you’re not at the table, you’re on the menu. And America’s big business lobbies and high-powered donors have gotten fat off a menu of free trade, financial deregulation, weak labor protections, and tax cuts. The power to set the agenda in Washington and in state capitals across the nation—the menu, if you will—rests almost entirely on having the money of a big corporation or trade association behind you, or a very fat bank account that can easily support checks containing six or seven zeros in the amount box. This cozy connection between big money and government has prompted many respected journalists and academics to declare that the United States is no longer a democracy but a plutocracy or oligarchy.10
Money has always played a role in our nation’s elections, but there used to be commonsense rules about where that money could come from, how it could be spent, and how much any individual or corporation could contribute.

Growth of public debt since 2007 (% of GDP)
Source: OECD Economic Outlook: Statistics and Projections
A further spurt of financialization then came with the Clinton administration and its spectacularly if only temporarily successful measures to shore up public finances.9 The budget surpluses briefly recorded around the turn of the millennium were due inter alia to sharp cuts in social spending. Financial deregulation made it possible to plug the gaps resulting from deficit reduction, by means of a rapid extension of loan facilities for private households at a time when falling or stagnant wages and transfer incomes, combined with rising costs of ‘responsible self-provision’, might otherwise have jeopardized support for the policy of economic liberalization. Credit expansion to replace collective provision and compensate for stagnant household incomes amounted to a crossroads in the economic history of democratic capitalism, which under the presidency of George W.

They also held each other in check, since the reckless behaviour of one individual could lead to losses that affected all partners in the firm.
But things changed in the 1970s and ’80s – because the rules governing the marketplace changed. In 1970, the New York Stock Exchange lifted its ban on investment banks becoming public corporations with listings on the stock exchange. As a result, the major US investment banks gradually switched over to the public model. In Britain, with the sudden financial deregulation of the Big Bang in 1986, small partnerships were also replaced by large investment houses.
In both countries, investment banks, no longer constricted by the responsibilities inherent in partnerships, were able to raise huge amounts of cash and grow much larger in size. ‘The Big Bang generation became millionaires at the same time as they were freed from the responsibility of looking after the partnerships,’ notes former British investment banker Philip Augar in ‌The Death of Gentlemanly Capitalism.6 Senior bank executives were no longer personally liable for their firms’ debts.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by
Carlota Pérez

The generalized shift into ‘the logic of the new’ requires two or
three turbulent decades of transition from one to the other, when the successful
installation of the new superior capacities accentuates the decline of the old.
By the time the process has fully taken place, the end of the previous revolution is little more than a whimper.
12.
Unfortunately this cosmological metaphor was also chosen to signal financial deregulation in the 1980s. In spite of the risk of confusion, it was still kept here because of its
appropriateness to describe a point in time that explodes into an expanding universe of
opportunities.
Technological Revolutions and Techno-Economic Paradigms
13
B. Five Constellations of New Industries and Infrastructures
Each technological revolution results from the synergistic interdependence of
a group of industries with one or more infrastructural networks.

US financial markets in fact remained “almost certainly the most highly regulated markets in history, if regulation is measured by volume (number of pages) of rules, probably also if measured by extent of surveillance, and possibly even by vigour of enforcement.”89 Indeed, rather than trying to understand the relationship between states and markets in the neoliberal era as being primarily about financial deregulation, it may be more useful to see it in terms of financialization developing through the agency of both old and new regulatory bodies. Indeed, the sheer density and continuing fragmentation of the regulatory landscape meant that either escaping or changing regulations became a key dimension in strategies of financial innovation and the construction of competitive advantage.
This could especially be seen in relation to the “derivatives revolution.”

…

The Ikeda system for providing cheap credit to industry was named after the finance minister during the crucial transition years of the late 1950s.
51 Moran, Politics of the Financial Services Revolution, p. 93.
52 Vogel, Freer Markets, p. 173.
53 In contrast to Susan Strange’s lament that Japan was opened up to the Western-style “casino capitalism,” Michael Moran points out that Japanese stock markets “have historically been, precisely, casinos—and, in British and American terms, casinos where trading took place in remarkably dishonest ways . . . The exchanges were privately controlled bodies whose purpose was to organize arenas for particular sorts of gambling, not to provide funds for industrial investment.” Politics of the Financial Services Revolution, pp. 112–13.
54 Iwami, “Removing Capital Controls,” p. 23.
55 See K. Osugi, “Japan’s Experience of Financial Deregulation since 1984 in an International Perspective,” BIS Economic Papers, no. 26 (January 1990); Iwami, “Removing Capital Controls,” p. 5; Goodman and Pauly, “The Obsolescence of Capital Controls?” p. 309.
56 Paul Volcker and Toyoo Gyohten, Changing Fortunes, New York: Times Books, 1992, p. 239.
57 R. Taggart Murphy, The Weight of the Yen, New York: Norton, 1996, pp. 144–5.
58 Ibid., p. 64.
59 Tett, Saving the Sun, p. 22.
60 In 1980 the US and Southeast Asia each accounted for 24 percent of Japanese exports, and Western Europe accounted for 17 percent; by 1984 Southeast Asia’s portion had fallen to 22 percent and Western Europe’s to 14 percent, while the US portion had risen to 35 percent.

BOX 2.1 Plenty of Blame to Go Around
The bipartisan Financial Crisis Inquiry Commission (established by Congress as part of the Fraud Enforcement and Recovery Act of 2009) released its report in January 2011. The many causal factors it highlighted include:
• Federal Reserve Chairman (1987–2006) Alan Greenspan’s refusal to perform his regulatory duties because he did not believe in them. Green–span allowed the credit bubble to expand, driving housing prices to dangerously unsustainable levels while advocating financial deregulation. The Commission called this a “pivotal failure to stem the flow of toxic mortgages” and “the prime example” of government negligence.
• Federal Reserve Chairman (2006-present) Ben Bernanke’s failure to foresee the crisis.
• The Bush administration’s “inconsistent response” in saving one financial giant — Bear Stearns — while allowing another — Lehman Brothers — to fail; this “added to the uncertainty and panic in the financial markets

Central bankers have
to be barred from having too much inﬂuence on matters of ﬁnancial
regulation. They are much too aligned with bankers’ interests. There
has to be regulatory knowledge and regulatory powers wielded by
democratically accountable people and institutions sufﬁciently removed
from the banking industry.
A Man-Made Crisis (and a Woman
Who Tried to Prevent It)
What happened between approximately 1980 and 2007 was credit creation
for speculative purposes run amok. Financial deregulation – arranged
in no small part by investment bankers in their capacity as treasury
secretaries – allowed the ﬁnancial sector to use and massively expand a
series of ﬁnancial innovations that ostensibly served to distribute risk and
90
ECONOMISTS AND THE POWERFUL
make the system safer. The real purpose was to extend the limits on money
creation. By the second quarter of 2007, after two decades of exponential
growth, assets held by securitization pools or at similar shadow banking
institutions that buy up loans and fund themselves by issuing securities
was US$16.5 trillion, or approximately the entire economic output of the
United States for one year.

.*
In addition to the impact of the introduction of New Public Management, neo-liberal policies have also indirectly, and unintentionally, increased corruption by promoting trade liberalization, which weakens government finances, which, in turn, makes corruption more likely and difficult to fight.14
Also, deregulation, another key component of the neo-liberal policy package, has increased corruption in the private sector. Private sector crookedness is often ignored in the economic literature because corruption is usually defined as the abuse of public office for personal gain.15 But dishonesty exists in the private sector too. Financial deregulation and relaxation of accounting standards have led to insider trading and false accounting even in rich nations – recall cases like the energy company Enron, and the telecommunications company WorldCom and their accountancy firm Arthur Andersen in the ‘Roaring Nineties’ in the US.16 Deregulation can also increase the power of private-sector monopolies, which expands the opportunities for their unscrupulous purchasing managers to take bribes from sub-contractors.

Morgan explained away the loss of billions from betting in the subprime mortgage market with the observation that the housing market’s direction is notoriously unpredictable.5 “I wasn’t good enough to tell you what was going to happen,” said Jimmy Cayne, the ex-CEO of Bear Stearns who had driven his company into oblivion.6
Unpredictable, incredible, and unbelievable were the words used in the fall of 2008 to describe the economic crisis by newspaper columnists, TV talking heads, and caption writers for newspaper photos of slumping floor traders with their heads in their hands. A once-in-a-lifetime catastrophe that no one could have foreseen, wrote thousands of financial advisers to their clients, desperately explaining away the massive meltdown of the customers’ 401(k) portfolios.
For years the influential New York Times columnist Thomas Friedman had been a breathless promoter of global financial deregulation. Through his columns, books, speeches, and TV appearances, Friedman had long rationalized the values of the get-rich-quick buccaneer economy. “International finance,” he proclaimed from the vortex of the boom, “has turned the world into a parliamentary system” that permitted newly enfranchised global citizens “to vote every hour, every day, through their mutual funds, their pension funds, their brokers.”7
As this glorious system unraveled, Friedman grasped Rubin’s reputation-saving metaphor:
We are in the middle of an economic perfect storm, and we don’t know how much worse it’s going to get.

The pitch that such zealotry reached was demonstrated by the verdict delivered in 1995 by Fischer Black, one of the founding fathers of options theory, on the cornucopia of new financial instruments that his models had helped to create. “I don’t see that the private market, in creating this wonderful array of derivatives, is creating any systemic risk,” Black argued; “[h]owever, there is someone around creating systemic risk: the government.”24
The manner in which anti-authority fantasies of this sort, and the automatic presumption in favour of practical financial deregulation which they supported, were rudely interrupted by reality during the crash of 2008 needs no rehearsal. Perhaps less well known are the practical consequences of the conversion of the policy-making world to the doctrines of the orthodox, New Keynesian macroeconomics on the other side of the schism. The most important of these concerned the correct objectives of monetary policy. The sole monetary ill that had been permitted into the New Keynesian theory was high or volatile inflation, which was deemed to retard the growth of GDP.25 The appropriate policy objective, therefore, was low and stable inflation, or “monetary stability.”

In particular, whereas US citizens can easily borrow on the back of future incomes, Chinese citizens cannot.
Imagine, also, that Chinese excess savings (in other words, the current-account surplus) are a fixed proportion of the value of Chinese national income. This is not a particularly far-fetched assumption: the vast majority of G7 countries found themselves with high household savings rates during the 1950s and 1960s, before the advent of financial deregulation.3 With this assumption, it’s easy enough to show that the US current-account deficit has to get bigger and bigger over time.
In my two-country model, the Chinese and US current-account positions must cancel each other out (there are only two countries, so there is no trade with the UK, Germany or Mars because these additional countries and planets don’t exist). If Chinese excess savings are a fixed proportion of Chinese national income, and Chinese national income is rising more quickly than US national income, it must follow that Chinese excess savings are rising as a share of US national income.

While the wealthiest Chinese business elite decamped to Singapore, a wave of revenge killings and attacks on property engulfed the rest of the Chinese minority, as ethnonationalism reared its ugly head in search of a scapegoat for the social collapse.9
The standard IMF/US Treasury explanation for the crisis was too much state intervention and corrupt relationships between state and business (‘crony capitalism’). Further neoliberalization was the answer. The Treasury and the IMF acted accordingly, with disastrous consequences. The alternative view of the crisis was that impetuous financial deregulation and the failure to construct adequate regulatory controls over unruly and speculative portfolio investments lay at the heart of the problem. The evidence for this latter view is substantial: those countries that had not liberated their capital markets—Singapore, Taiwan, and China—were far less affected than those countries, such as Thailand, Indonesia, Malaysia, and the Philippines, that had.

If they know that they are not going to stay in the civil service very long, they will have all the more incentive to cultivate their future employment prospects.iii
In addition to the impact of the introduction of New Public Management, neo-liberal policies have also indirectly, and unintentionally, increased corruption by promoting trade liberalization, which weakens government finances, which, in turn, makes corruption more likely and difficult to fight.14
Also, deregulation, another key component of the neo-liberal policy package, has increased corruption in the private sector. Private sector crookedness is often ignored in the economic literature because corruption is usually defined as the abuse of public office for personal gain.15 But dishonesty exists in the private sector too. Financial deregulation and relaxation of accounting standards have led to insider trading and false accounting even in rich nations – recall cases like the energy company Enron, and the telecommunications company WorldCom and their accountancy firm Arthur Andersen in the ‘Roaring Nineties’ in the US.16 Deregulation can also increase the power of private-sector monopolies, which expands the opportunities for their unscrupulous purchasing managers to take bribes from sub-contractors.

It should take the chance
to demerge these behemoths that grew so complicated that they couldn’t keep track of
our money or their own money. A rich, diverse ecology of different economic systems
is needed, not a banking monoculture of giant actors which, when they topple,
threaten us all.
2 Segregate financial markets – by separating activities such as
trading and retail banking
A central plank of the process of financial de-regulation has been the removal of
restrictions on what activities different institutions can undertake. It took more than
50 years for policy makers to forget the lessons of the Wall Street crash of 1929,
which led to the Glass-Steagal Act in the USA to prevent financial institutions exploiting their market position and power and profiting from conflicts of interest.
Segregation was seen as ‘inefficient’ and was swept away by liberalization.

As the historian Harold James notes, this liberalization of capital flows meant that “economic issues became globalised—in other words, it was ever harder for national authorities to control them.”9
By 1981, three of Thatcher’s signature policies were in place: the abolition of exchange controls, cuts in direct taxation, and moves to curb the power of trade unions. Britain was in the midst of a deep recession and manufacturing industries were suffering badly. But the foundations for a boom in the City of London had been laid.
In 1982, the evocatively named LIFFE futures trading exchange opened in the City. In 1986, the Thatcher government pushed through the “Big Bang” of financial deregulation in the City, which Andrew Marr suggests “has a claim to be the single most significant change of the whole Thatcher era.”10 The brash city trader, along with the striking miner, became one of the emblematic figures of the Thatcher era.
Thatcher herself seemed ambivalent about the surge in conspicuous consumption in the City. She never quite shook off her Methodist origins and perhaps she also sensed that the electorate disapproved of the champagne-swilling, Porsche-driving “wide boys” in the City.

Mishkin even took $124,000 from the Iceland Chamber of Commerce to write a paper endorsing the country’s economic model, just a few years before it collapsed.
What we are left with is confusion that arises from an ambiguity of roles: Are our regulators attempting to rein in the excesses of those they regulate or are they auditioning for a lucrative future job? Are economists who publish papers praising financial deregulation giving us an honest assessment of the facts and trends or courting extremely lucrative consulting fees from banks?
In her book about the new global elite, Janine Wedel recalls visiting the newly liberated Eastern Europe after the fall of the Berlin Wall and finding the elites she met there, those at the center of building the new capitalist societies, toting an array of different business cards that represented their various roles: one for their job as a member of parliament, another for the start-up business they were running (which was making its money off government contracts), and yet another for the NGO on the board of which they sat.

Securities and Exchange Commission (SEC)
Financial Industry Regulatory Authority (FINRA)
Commodity Futures Trading Commission (CFTC)
Federal Reserve (Fed)
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency (OCC)
National Credit Union Administration (NCUA)
Office of Thrift Supervision (OTS)
All of these agencies were enormously active during the so-called laissez-faire era. As the former CEO of BB&T Bank John Allison notes, “Government spending alone . . . on financial regulations (not company bailouts) increased, in adjusted dollars, from $725 million in 1980 to $2.07 billion in 2007.”41 Meanwhile, between 1980 and 2009, for every one instance of financial deregulation, there were four instances of new financial regulation.42 It is one thing to claim that regulators didn’t do their job during the last few decades, or that the government should have placed even more regulatory restrictions on the financial industry—all that is debatable—but it is quite another thing to describe the last few decades as a time when financial markets were deregulated, let alone unregulated.43
The Inequality Narrative tells a seductively simple story: when the government intervenes in the economy to fight inequality, a nation prospers; when the government takes a hands-off approach to the economy, “the rich” gain at the expense of everyone else.

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No Is Not Enough: Resisting Trump’s Shock Politics and Winning the World We Need
by
Naomi Klein

If that is allowed to happen, it really would rob us of our last chance of averting catastrophic climate change.
So, in a very real sense, preventing war and averting climate chaos are one and the same fight.
Economic Shocks
Just as Trump could not be unaware that his anti-Muslim actions and rhetoric make terror attacks more likely, I suspect that many in the Trump administration are fully cognizant of the fact that their frenzy of financial deregulation makes other kinds of shocks and disasters more likely as well. Trump has announced plans to dismantle Dodd–Frank, the most substantive piece of legislation introduced after the 2008 banking collapse. Dodd–Frank wasn’t tough enough, but its absence will liberate Wall Street to go wild blowing new bubbles, which will inevitably burst, creating new economic shocks.
Trump’s team are not unaware of this, they are simply unconcerned—the profits from those market bubbles are too tantalizing.

In the former group (United States, United Kingdom, Ireland, Spain, Iceland, Australia, and New Zealand) the response was one of democratization of credit that allowed households to borrow and spend beyond their means: the boom in mortgage and consumer credit (credit cards, auto loans, student loans, payday loans, subprime loans, and so on) led to a massive increase in private household debts that found it matching in the rising leverage of the financial sector (banks and shadow banks). This financial system leverage was abetted by reckless financial deregulation—repeal of Glass Steagall, non-regulation of derivatives, explosion of toxic financial innovation, rise of a subprime financial system, explosion of the shadow banking system. Since households, and the country, were spending more than their incomes, all of these Anglo-Saxon countries run large current account deficits financed by over-saving countries (China and emerging markets, as well as Germany and Japan).

Why would Israel want to turn them away?
For their part, the oligarchs and organized crime bosses started colonizing Israel for a number of reasons. It was an ideal place to invest or launder money. Israel’s banking system was designed to encourage aliyah, the immigration of Jews from around the world, and that meant encouraging their money to boot. Furthermore, Israel had embraced the zeitgeist of international financial deregulation and considerably eased controls on the import and export of capital. And, like most other economies around the world in the 1990s, it had no anti-money-laundering legislation. Laundering money derived from criminal activities anywhere else in the world was an entirely legitimate business.
Israeli police have estimated that these Russians laundered between $5 and $10 billion through Israeli banks in the fifteen years since the collapse of Communism.

The United States invaded Iraq, believing that merely by replacing the nation’s dictator and political institutions they could easily remake a nation. The invaders were oblivious to the psychological effects a generation of tyranny had wrought on Iraqi culture, the vicious hatreds that lurked just below its surface—circumstances that quickly produced an ethnic bloodbath.
Harold’s list of failed policies went on and on: financial deregulation that assumed global traders needed no protection from their own emotional contagions; enterprise zones based on the suppositions that, if you merely reduced tax rates in inner cities, then local economies would thrive; scholarship programs designed to reduce college-dropout rates, which pretended the main problem was lack of financial aid, when in fact only about 8 percent of students are unable to complete college for purely financial reasons.

If at the same time money has been demystified and stripped of its quasi-religious golden trappings, debt starts to be treated as an everyday consumer product, without the free offer of Victorian morality annoyingly attached to it in the past. And in liberal societies, where adult citizens are allowed to decide on most aspects of their lifestyle, paternalistic regulations to protect borrowers and lenders from their own supposed imprudence naturally erode. Thus, some of the financial deregulation often blamed for allowing the crisis was a reasonable and predictable response to long-term social progress.
The result of all these changes was a natural increase in the use of credit and, eventually, of other more sophisticated financial products. This was the story of the world financial system until the last years of the global borrowing and lending boom. It was only in that last year or so that the process went suddenly, but briefly, mad.

As investors fled, funds had to disgorge themselves of assets, and bread-and-butter corporations lost a prime source of credit. Rates on commercial paper soared, and many companies couldn’t borrow at any price. Blue-chip AT&T, which normally funded itself with thirty-day paper, was reduced to living on the shoestring of overnight credit.
Corporate America’s dependence on short-term IOUs had its roots in the intellectual revolution sparked by financial deregulation in the late 1970s and early 1980s. In the emerging Age of Markets, academics posited a theory of perfect (or, as they phrased it, “efficient”) markets, in which risk management practically took care of itself. Gurus of efficient-market theory, notably Michael Jensen of the Harvard Business School, preached the gospel of maximizing every asset at every instant, with the corollary that it was a waste of shareholder resources to maintain a rainy-day fund—some extra cash—in the till.

DEMOCRATS IN GLOBALIZING AMERICA
Despite Clinton’s economy-focused campaign theme, his specifics were vague.62 Clinton had constructed his ideas in the 1980s, when the economy was growing and many Democrats believed that their party needed to accommodate Reaganomics. The party’s main criticism of Reagan’s doctoring, the budget deficit, offered no solution to the recession of 1990–91. The downturn was the last act of the high interest rates in the early 1980s, the tax reductions of 1981, and the financial deregulation that began in the Carter years. After the savings and loan bailout and partial reregulation, bank lending policies were cautious, too cautious.63 Investment plummeted for a year, beginning in the third quarter of 1990.64 Fighting the last war, one Fed staffer remarked, “We can’t go out and create a recession to control inflation, but we can try to take advantage of any little recessions that happen to come our way.”65 So even though inflation was negligible, the Fed was slow to reduce interest rates.

Iceland remains deeply scarred from its huge financial bubble, which I described at length in Aftershock.
388 One bank let a firm selling yachts grant loans on its behalf. The firm could even grant loans to new customers on weekends when it was impossible to control their creditworthiness. Unsurprisingly, both the firm and bank soon went out of business, the latter by merging with a large commercial bank that was rescued by the government in 1991. See Erling Steigum, "Financial Deregulation with a Fixed Exchange Rate: Lessons from Norway’s Boom-Bust Cycle and Banking Crisis", 2003. http://www.norges-bank.no/Upload/import/publikasjoner/skriftserie/33/chapter2.pdf
389 The banking crisis started in the late 1980s in Norway and in the early 1990s in Finland and Sweden.
390 They extended loans worth 20 per cent of Swedish GDP, pumping up local housing bubbles, with Swedbank and SEB in particular taking big risks. http://www.economonitor.com/analysts/2009/06/24/swedish-banks-could-they-get-burned-by-heavy-baltic-exposure/
391 Personal calculations from Office for National Statistics, net financial liabilities of households and non-profit institutions serving households (code: AF.L) divided by four-quarter moving sum of their gross disposable income (code: RPHQ).

John Barkham Review
‘Valuable and readable … Britain cannot seem to shake its class system … it is splitting Britain, [creating] “a permanent sub-class, trapped like the children of the Victorian destitute on the pavements outside, staring through the window at the goodies”.’
Milwaukee Journal
‘A startling and important account’
Blitz
‘People here [Chesshyre writes] are locked into a fatalistic indolence by rigid class structures, an outmoded and debilitating education system, and post-imperial delusions of grandeur.’
Sunday Times
‘A good reporter, he went looking for answers … to the City (London’s Wall Street), where the “Big Bang” of financial deregulation had dizzied the banking world with unchecked greed and unprecedented profits … reading this lively and anecdotal volume is a refreshing experience for an American.’
Boston Globe
‘A formidable achievement, full of lessons for both left and right … One of that rare breed – a liberal who sends his children to state schools – he is appalled by the narrow appeal of Thatcherism …’
New Society
‘This [is a] ruthlessly brutal, exceptionally well-written denouncement of Britain in the late 1980s.

He is currently finishing a manuscript on the World Bank that provides an inside look at the Bank’s management, its lending operations, and the theft of billions of dollars from its lending portfolio. He lives in Leesburg, Virginia.
The English novelist Somerset Maugham famously described Monaco, the Mediterranean tax haven, as a “sunny place for shady people.” In the mid-1980s, economist John Christensen returned to Jersey, a not-so-sunny place for shady people in the English Channel, to investigate how these offshore tax havens work. During the boom years of financial deregulation he worked as a trust and company administrator and as economic adviser to the island’s government. Though committed to principles of fair trade and social justice, he became involved in a globalized offshore financial industry that facilitates capital flight, tax evasion, and money laundering. In 1998 he resigned from his post on Jersey, moved with his family to the UK, and became a founder member of a campaign to highlight how tax havens cause poverty.

As current voting members of the Fed board stepped aside, the Reagan White House appointed members who would be known as “doves.” They didn’t like inflation, but they were even less enthusiastic about doubledigit unemployment.
15 Lewin, “Quiet Allure of Alan Greenspan.”
16 Barrie A. Wigmore, Securities Markets in the 1980s, vol. 1 (New York: Oxford University Press, 1997), p. 39.
Jimmy Carter had opened the path to financial deregulation in the 1970s.17 The Federal Reserve reduced the reserve requirements of banks (after congressional authorization).18 This helped to expand credit. Total credit market debt—government, corporate, and consumer—grew by $533 billion in 1981 and by $1.1 trillion in 1985.19 The eighties would later be known as the Decade of Greed.
The greedy federal government spent $128 billion more than it received from taxes in 1982; by 1983, the federal budget deficit swelled to $221 billion.

But even as the search for risk-management techniques was gaining popularity, the 1970s and the 1980s gave rise to new uncertainties that had never been encountered by people whose world view had been shaped by the benign experiences of the postwar era. Calamities struck, including the explosion in oil prices, the constitutional crisis caused by Watergate and the Nixon resignation, the hostage-taking in Teheran, and the disaster at Chernobyl. The cognitive dissonances created by these shocks were similar to those experienced by the Victorians and the Edwardians during the First World War.
Along with financial deregulation and a wild inflationary sleighride, the environment generated volatility in interest rates, foreign exchange rates, and commodity prices that would have been unthinkable during the preceding three decades. Conventional forms of risk management were incapable of dealing with a world so new, so unstable, and so frightening.
These conditions gave rise to a perfect example of Ellsberg's ambiguity aversion.

Happily for central banks, at least in the short run, the fall in global real interest rates was what Hyman Minsky called a ‘displacement’ event – the beginning of a runaway credit boom. House-price rises set these credit booms in motion, above all in the US, but also in a number of other high-income and emerging countries in the western, southern and eastern periphery of Europe with elastic credit. So central banks had something to build upon.
Financial Deregulation
Central banks were pouring petrol on the flames, because they wanted a blaze. The increasingly liberalized financial sector was only too happy to burn. Its richly rewarded participants found the borrowers they needed among foolish and ill-informed households. They found the purchasers of the securities they created among foolish and ill-informed investors, some of whom even turned out to be perversely rewarded parts of their own organizations.

Betting on the climate has a place. In my previous book I advocated the exploration of new exotic financial instruments for just this reason. We need them. But we need a more honest and sustainable approach to networked economics even more—an approach that could bring about the very positive side benefit of subduing the scams that blind.
Consider an old-fashioned way to fight economic scamminess, regulation. Critics of financial deregulation in the United States point out that before the Great Depression there had been a decades-long sequence of frequent and destructive market busts. Regulations put in place in response to the Depression seemed to lead to happier market conditions until deregulation in the late 20th century ushered back in the same old chaos.
The politics of reinstating old regulations appear to be uncertain, but also it’s becoming harder for regulation to keep up with technology.

I’m afraid to say now the lenders are more like bartenders serving drinks to people who’ve already had too much.’
Mr Elliott was particularly concerned with the plethora of credit cards, store cards and personal loans being thrown at Britain’s masses. The story of Britain’s mortgage madness is connected to its general consumer credit excess. Both were underpinned by the same wave of easy money coursing from the East, accommodated by low interest rates from the Bank of England and financial deregulation. The bigger picture was the use of credit to artificially boost stagnant and then falling pay packets for middle earners.
The sophisticated abuse of unsecured debt reached its nadir with the habit of lenders actively increasing credit-card limits on customers who ‘max out’ their plastic each month, only repaying the minimum repayment. Quite quickly, such methods create large debts, subject to massive recurring interest payments.

It would have been almost impossible to establish a government without including members of the Baath party, since membership was a virtual requirement for holding a position of responsibility under Saddam Hussein. Similarly, it would have been almost impossible to get to the top echelons of power, or even the middle ranks, during the Clinton-Bush years without giving lip service to the policies of one-sided financial deregulation and bubble-driven growth that were so fashionable at the time.” And those leading Obama’s economic team gave more than lip service. They were instrumental in designing the policies that have led to the present crisis.31
Early on, as noted earlier, the chair of the prestigious corporate law firm Sullivan & Cromwell, predicted “that Wall Street, after getting billions of taxpayer dollars, will emerge from the financial crisis looking much the same as before markets collapsed.”

Simon Johnson, an MIT professor and former chief
economist of the International Monetary Fund, drew on his experience to argue that
everywhere the fund was called on to intervene, it found oligarchies seeking to shelter
themselves and off-load the burdens of reform onto other constituencies (or foreign lenders).
Oligarchies are a standard feature in emerging markets, Johnson asserted in a 2009 article in
The Atlantic, but not just there. In fact, he argued, the United States set the lead here, too: “Just
as we have the world’s most advanced economy, military, and technology, we also have its
most advanced oligarchy.” He pointed to lobbying, financial deregulation, and the revolving
door between Wall Street and Washington and argued in favor of a “breaking of the old
elite.”32
Such analyses inform a more general belief that is so pervasive as to have become almost a
collective instinct: “Power and wealth tend to concentrate. The rich will become richer and
the poor will stay poor.” This rendering of the idea is something of a caricature, yet it is the
default assumption underpinning conversations in parliaments, at millions of household dinner
tables, in university halls and at after-work gatherings of friends, in erudite books, and in
popular TV series.

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Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by
Danielle Dimartino Booth

Only the quiet, unheralded loss of some fundamental freedoms: the freedom to save for our retirements risk free, the freedom to sleep in peace knowing our pensions are safe, and the freedom for U.S. companies to invest in our nation’s future.
The FOMC’s vote during its final meeting of 2008 didn’t come from nowhere. It was part of a long tradition of economic interference by well-meaning bureaucrats, going back to the 1930s and accelerating with Federal Reserve Chairman Alan Greenspan in the 1980s.
Greenspan championed the era of financial deregulation that drove Wall Street to levels of greed that surprised even the most hardened investment banking veterans.
His pragmatic response to every crisis on Wall Street? Lower interest rates, which Greenspan did again and again and again. Blow bubbles and pray they don’t pop.
But they always do.
In the late 1990s, dot-com companies soared far beyond true valuations; reality pricked that balloon in 2001.

This is not unlike the system that Scotland operated with such success for so long.
The China price
Surely, though, the great financial crisis that began in 2008 was caused by too little regulation, and too much greed? So at least goes the conventional wisdom. The repeal of the Glass-Steagall Act (which separated banking and securities trading) in 1999 was the culmination of a decade of financial deregulation, according to this view. Like so much conventional wisdom, this is almost wholly wrong.
As the author George Gilder comments, in the run-up to the crisis, ‘every large institution was thronged with examiners, overseers, supervisors, inspectors, monitors, compliance officers and a menagerie of other regulatory constabulary’. These invariably gave the institutions a clean bill of health right up till the moment they declared them in need of bail-out.

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An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
by
Marc Levinson

On average, output per hour worked in nonfarm businesses, a key measure of productivity, grew more slowly during the Reagan years than at any time before 1977, when marginal tax rates had been far higher. Historically, productivity growth had led to higher wages and higher living standards. In the 1980s, it no longer did so.28
One cause of this disappointment was what sociologist Greta Krippner refers to as “financialization.” As she argues, a combination of financial deregulation and high interest rates made it sensible for businesses to focus on making money from money in the rapidly expanding credit markets. This shift “took the form of nonfinancial firms withdrawing capital from long-term investments in plant and equipment and diverting resources into financial investments.” This trend was noted as early as 1983, when the Reagan-appointed Commission on Industrial Competitiveness observed that the return on investment in financial assets was higher than the return on manufacturing assets, and it grew more pronounced over the course of the decade.29
The results can be seen in the pattern of business investment.

pages: 385words: 118,901

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
by
Sheelah Kolhatkar

In the end, the evidence against him that the government spent nearly ten years assembling was never presented to a jury. All that was left was for Cohen to spend his billions and to plan for his return.
Now Cohen is making more money than ever. In 2014, trading only his own fortune, he earned $2.5 billion in profit, more than paying back the fines he was ordered to hand over to the U.S. government. Then, on November 8, 2016, Donald Trump was elected president, vowing to usher in a new era of financial deregulation. The general counsel for Point72, Cohen’s private investment firm, was appointed, briefly, by the incoming Trump administration to recruit candidates for the new Justice Department during the tumultuous transition. In the meantime, Cohen is making plans to reopen his hedge fund as soon as possible.
For Seth
CAST OF CHARACTERS
At the time of the events depicted
SAC CAPITAL ADVISORS, STAMFORD, CONNECTICUT
THE EXECUTIVES
Steven A.

He rented an office a block away from his co-op on Central Park West, bringing along his partner from Bleichroeder, an irascible, workaholic analyst named Jim Rogers. Interviewed years later in his Manhattan home, Rogers conducted the discussion while wincing and gasping on an exercise bike that was rigged up with a laptop and phone for maximum multitasking.6 Together with Rogers, Soros continued to look for moments when an unstable equilibrium might reverse. He saw, for example, that financial deregulation was changing the game in banking, transforming a dull sector of the stock market into a sexy one: He made a fortune from bank stocks. He spotted that the Arab-Israeli war of 1973 changed the game for the defense industry, since Soviet weaponry used by Egypt had performed well, demonstrating that the United States faced a greater challenge than previously imagined. Soros predicted that the Pentagon would soon persuade Congress to authorize some catch-up investments.

The government’s money, for the most part, didn’t go to the smaller regional and community banks that focus on lending to small and medium-size enterprises.18 Not surprisingly, hundreds of these smaller banks went bankrupt,19 and hundreds more were in such a precarious position that they had to curtail lending.20 For a strategy aimed at maintaining the flow of credit, the Fed’s decisions (together with Treasury) were deeply flawed.
Deregulation: key to the increasing financialization of the economy
This deference to the banks lies at the center of the Fed’s, and other central banks’, greatest contribution to inequality: their failure to impose adequate regulation and to adequately enforce regulations that existed—the culmination of two decades of financial deregulation that had begun under President Reagan. The Fed and its chairman Alan Greenspan were instrumental in stripping away the regulations that had been so important in ensuring that the financial system served the country well in the decades after the Great Depression. They were also instrumental in preventing new regulations to reflect changes in the financial sector, such as the development of derivatives, that posed threats to the stability of the financial and economic system.21
This deregulation had two related consequences, both of which we noted earlier.

And even if the Nauruans had wanted to eat differently, it would have been hard: with so much of the island a latticework of deep dark holes, growing enough fresh produce to feed the population was pretty much impossible. A bitterly ironic infertility for an island whose main export was agricultural fertilizer.12
By the 1990s, Nauru was so desperate for foreign currency that it pursued some distinctly shady get-rich-quick schemes. Aided greatly by the wave of financial deregulation unleashed in this period, the island became a prime money-laundering haven. For a time in the late 1990s, Nauru was the titular “home” to roughly four hundred phantom banks that were utterly unencumbered by monitoring, oversight, taxes, and regulation. Nauru-registered shell banks were particularly popular among Russian gangsters, who reportedly laundered a staggering $70 billion of dirty money through the island nation (to put that in perspective, Nauru’s entire GDP is $72 million, according to most recent figures).

When Soros’s The Alchemy of Finance was first published in 1987, academics ignored or dismissed the reflexivity idea, partly because the practitioner-oriented book was written “in a different language”. Yet, it has found a large following among investors and it may have also influenced later academic work on positive-feedback trading and on bubbles. Other research also confirms that fast credit growth and financial deregulation /innovation are common characteristics of major booms that end in tears.
Bubbles have a long, infamous history since the Dutch tulip mania (1637) and the South Sea and Mississippi company bubbles (both about 1720). Wall Street in 1929, Japan in 1989, and global technology stocks in 1999 are the most famous equity market bubbles of the past century. Of course, there are alternative explanations for these high equity prices but the explanations involving purely rational stories, such as time-varying risk premia, are unsatisfactory.

For the present-day student of politics, reading the memoirs of Prior and his like-minded colleagues is to breathe the air of a vanished age—a bit like perusing the memoirs of the aristocrats who fled revolutionary France or the liberal democrats exiled from Russia by the Bolsheviks. For better or worse, the Conservative opponents of Margaret Thatcher palpably belong to a vanished world.
Of course, one can argue that the battles of 1979 gave little indication of the revolutionary scale of what was yet to come: the epic confrontation with the coal miners, the financial deregulation of the “Big Bang,” the far-reaching sell-off of state-owned corporations. Indeed, the word privatization, taken up by Joseph and his followers, was just on the verge of widespread acceptance, an evolution that underlined just how entrenched statist assumptions had become. (Thatcher originally preferred the less provocative denationalization, but it proved too unwieldy.) In 1979, though, Thatcher and her supporters spoke only of “selling shares” in the nationalized industries.

In the US, the options market established in Chicago in 1972 expanded rapidly, and ultimately developed into a multiproduct derivatives market. Britain abolished exchange controls in 1980, and the second financial futures exchange market, after Chicago, was established in London in 1982. France followed, setting up its own futures exchange, MATIF, in 1986. Germany remained more cautious about financial deregulation, although cross-border capital controls were eliminated in 1981. The Asian financial markets, particularly Hong Kong and Singapore, took advantage of their loosely regulated environment to attract financial transactions, winning market shares over a more regulated Tokyo stock-exchange market. The full deregulation of financial markets in the City of London in October 1987 opened a new era of financial globalization, in spite (or because?)

But the financial landscape in early 2007 made the risk look less worrisome. Home values had been climbing for years, and it seemed they always would. The S&P 500 index had almost regained the ground it lost after the tech-stock collapse in 2000. Even the battered NASDAQ composite index was back where it had been in January 1999, before the last puff of air went into the Internet bubble. Financial deregulation still looked like an excellent idea. So did all the creative financial engineering that produced the Fairfield Sentry derivative notes and the countless other complicated derivatives that were being embraced by institutional investors everywhere.
So it appeared that Madoff had guessed correctly when he raised his rates, and his gamble paid off. Investors were still more interested in high profits than in safety.

While he is right to identify this as important, he misses other critical ingredients.”165 Jeffrey Miron of Harvard muddied the waters further by introducing the Rogoff Reinhart neoliberal line: “In asking whether the recent financial crisis could have been avoided, the crucial fact is that crises of various flavors have occurred for centuries in countries around the world. Thus, any explanation based mainly on recent factors—subprime lending, derivatives trading, or financial deregulation—cannot be the whole story. A full account must identify factors that have been present widely, and for centuries.”166 How the Dutch Tulip craze would help illuminate the structural deficiencies of a CDO-squared was left for someone else to figure out. I cannot find an example of an orthodox economist who came right out and said that the entire exercise was a cynical whitewash, although many bloggers came close.

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The Great Leveler: Violence and the History of Inequality From the Stone Age to the Twenty-First Century
by
Walter Scheidel

I already mentioned that the competitive pressures of globalization may influence legislative outcomes at the national level. But politics and economic disequalization interact in manifold ways. In the United States, both of the dominant parties have shifted toward free-market capitalism. Even though analysis of roll call votes show that since the 1970s, Republicans have drifted farther to the right than Democrats have moved to the left, the latter were instrumental in implementing financial deregulation in the 1990s and focused increasingly on cultural issues such as gender, race, and sexual identity rather than traditional social welfare policies. Political polarization in Congress, which had bottomed out in the 1940s, has been rapidly growing since the 1980s. Between 1913 and 2008, the development of top income shares closely tracked the degree of polarization but with a lag of about a decade: changes in the latter preceded changes in the former but generally moved in the same direction—first down, then up.

Adaptive Markets: Financial Evolution at the Speed of Thought
by
Andrew W. Lo

The SEC committed a
critical regulatory error, the five largest broker-dealers took advantage
of it, and the consequences were obvious. Bear Stearns failed because
its debt-to-equity ratio rose from a safe, SEC-monitored 12-to-1, to an
imprudent, reckless 33-to-1 under minimal SEC supervision. This was
the murder weapon, fingerprints and all, that explained the death of
Bear Stearns, Merrill Lynch, and Lehman Brothers. This explanation
appealed to everyone’s heuristics. People hostile to financial deregulation
used this narrative as evidence that deregulation caused the financial
crisis. People hostile to Big Government used this narrative as evidence
that bad regulation caused the financial crisis.
Like a virus, this error quickly spread from journalism into academia.
John C. Coffee at the Columbia School of Law, a recognized expert in
securities regulation, repeated the misunderstanding in the December 5,
310 • Chapter 9
2008, edition of the New York Law Journal: “The result was predictable:
all five of these major investment banks increased their debt-to-equity
leverage ratios significantly in the period following their entry into the
CSE program.”16 At the annual meeting of the American Economic Association in San Francisco, Susan Woodward, a former chief economist
for the SEC, cited this rule change as causing the increase in leverage in
a panel discussion on the ongoing financial crisis on January 3, 2009.17
Princeton’s Alan Blinder was on that panel as well.

In early October, Morgan Stanley, fearing clients would miss the next leg of the bull market, exhorted them to be 100-percent invested in common stock. Later, when it sent financial commentator Adam Smith an exuberant buy recommendation, he mused, “You had me one hundred percent invested in October and I lost half my money. How am I supposed to buy something now?”15
Where 1929 was a home-grown American crash, 1987 was a global panic. Around the world, stocks rose, crashed, then rebounded together. The same financial deregulation that had interlaced markets led to synchronized drops in Tokyo, Hong Kong, New York, London, Paris, and Zurich. “For days everyone just kept passing the bear market around the time clock,” said Barton Biggs of Morgan Stanley. New links among world stock markets seemed to exaggerate movements in both directions, accentuating the instability of the world financial system instead of ironing out fluctuations.